IR35 marks its tenth anniversary

Ten years ago today, the Budget of then Chancellor Gordon Brown, gave birth to IR35.

As is customary in these cases, much of the detail of the Chancellor's proposals is contained in the hundreds of pages of supplementary documentation which appears once the Chancellor closes his red box and sits down.

The 35th such release from the Inland Revenue - hence IR35 - said the following: "There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged 'consultant' paying substantially reduced tax and national insurance.

"The Government is going to bring forward legislation to tackle this sort of avoidance. The Inland Revenue will be discussing the practical application of new legislation with interested parties and will work with representative bodies on the production of guidance. The new rules will take effect from April 2000."

And so IR35 came into the contractors' world. The original intention, as stated in the Revenue's press release, was to stop an exploitative practice of sacking employees on a Friday and 're-employing' them in the same role as a contractor on a Monday. But it soon became clear that its scope was going to be much wider.

Contractors

Contractors - primarily but not exclusively IT freelancers - banded together via their chosen medium of communication, the internet, to create what was probably the first wholly internet-based lobbying campaign. Through what evolved to be the Professional Contractors Group, several thousand contractors succeeded in raising the profile of this obscure piece of legislation.

Several battles were won en route, but ultimately not the war. The contractors in the PCG organised a fighting fund to have the issue taken to the High Court and Court of Appeal for a judicial review. A few dozen of them planned to visit Parliament on one particular day to 'Green Card' lobby their MPs - in the event over 700 turned up for what became known as 'Contractor Wednesday'. The House of Lords gave temporary hope to contractors by voting out the proposal - only to have it reinstated in the Commons.

Ultimately, the Government's considerable majority prevailed and IR35 became law.

Bad law

The problem was that IR35 was - and still is - bad law. Not so much regarding the fairness or otherwise of it, that's a different debate. It is bad law because it is unclear.

It has been left to the courts to interpret what it actually means - and as a result there has been a decade of conflicting decisions from the Commissioners and appeals and counter-appeals to the higher courts.

An indication of this uncertainty is the insurance policies which contractors now feel they need to take out in order to sleep peacefully at night. Insurance is usually taken out for things over which you have no control, for example a car accident, house break-ins etc. But many contractors now insure their businesses against the possibility of a HM Revenue and Customs tax investigation because of the uncertainty surrounding status issues and a resulting lengthy and costly case against HMRC.

Ten years on, 'black' and 'white' are still not words often associated with IR35. Contractors are now as familiar with terms such as 'right of substitution', 'mutuality of obligation' and 'case law', as many tax lawyers and accountants.

Future

Many people feel that IR35 was a politically-motivated law, which was defended vigorously by the then Paymaster General Dawn Primarolo, who seemed to have a personal campaign against people she referred to as 'disguised employees', 'silly consultants' and 'tax cheats'.

The irony is that no-one knows whether IR35 has actually worked, either in terms of preventing the so-called 'Friday-to-Monday' scenario, or, more importantly, as a tax raising measure. There is no evidence that IR35 is raising any money: despite questioning the House of Parliament, Ministers have been unable to place a figure on the financial benefit - or cost - of IR35 to the Exchequer.

There seems little likelihood that a Labour Government will overturn the measure. The Conservatives have gone as far as to say they will review it alongside a general review of tax policies, but there is no commitment to repeal on the political front.

Case law is costly and drags on, and sometimes adds to the confusion rather than clarifies it.

However, the lack of clarity can also work to the contractors' advantage. With adequate professional support and knowledge of the regulations, the vast majority of cases taken to the Commissioners have gone in the contractors' favour.

But having to work in a climate dominated by shades of grey... is no way to run a railway - or a small business.