IR35 was initially brought in to tackle “tax avoiders” who did not meet the requirements of a self-employed individual but were also not classed as permanent employees, i.e. contractors. These contractors, because they are not classed as either self-employed or permanent employees, but performed similar roles to permanent employees, traditionally paid less tax.
It was thought that individuals who were permanently employed were merely acting as a contractor to pay less tax. Consequently, IR35 legislation was formed.
When IR35 was brought in, it was intended to claim back some of this shortfall for HMRC. Contractors that now fall into IR35, deduct their expenses and then pay National Insurance and Schedule E Taxation. Contractors that fall under IR35 pay more tax than those who are permanently employed but do not have the same benefits such as pension fund and holiday & sick pay.
IR35 has long been an unpopular piece of legislation and has been described as “the bane of many contractors’ lives.” Some contractors say they have been unfairly affected by the IR35 legislation because of the murky waters that cloud the definition of employment status. In fact, there is no definitive, statutory definition of employment status; workers are judged by employment case law dating back years.
However, the recent Uber ruling by the London employment tribunal, that stated drivers with the company are legally considered to be self-employed workers, with employment rights, could change the way IR35 works.
This ruling could set a precedent for future court cases surrounding employment status and IR35. Whilst no changes have been specifically outlined, experts are encouraging companies to review the terms and conditions of their contracts for clarity. As well as advising contractors to take steps to ensure that they fall outside of IR35.