Under Chapter 8, the worker of the limited company is responsible for assessing their IR35 status under the rules and paying the appropriate National Insurance and Income Tax to HMRC.
New legislation was introduced on 6 April 2017 (Chapter 10 Income Tax (Earnings & Pensions) Act 2003) to make public sector organisations responsible for assessing whether an individual providing services for their organisation on a contract basis fell under IR35 rules, and for paying the National Insurance and Income tax to HMRC where relevant.
[3][4] On 17 October 2022 however, the newly appointed Chancellor of the Exchequer, Jeremy Hunt, announced that the repeal would not go ahead and Chapter 10 would remain in place.
[5] In 1999, as part of that year's Budget, the UK's Chancellor of the Exchequer, Gordon Brown, announced that measures would be introduced to counter tax avoidance by the use of so-called "personal service companies".
The legislation has been consolidated in the Income Tax (Earnings and Pensions) Act 2003 and in the Statutory Instrument Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727.
The Finance Act 2017 implements changes in the process for determining the amount of Income Tax and National Insurance to be deducted.
Professional advisors now do not recommend that family members should be allocated shares in the company unless they perform a significant role in the business (not just bookkeeping).
On 20 May 2010, the new Liberal Democrat/Conservative coalition government's Programme for Government announced a commitment to "review IR 35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.
An additional sense of grievance felt by those who were driven to incorporate, for whatever reason, was the large disparity between the National Insurance burden on companies and employees (>20% if the employer's contribution is included) and that imposed on the self-employed.
The stated aim of the measure was to prevent workers from setting up limited companies via which they would work effectively as employees, but saving on Income Tax and National Insurance.
The so-called "Friday to Monday" scenario, that it was possible for a worker to leave a job on Friday and return on Monday to be doing the same work for the same company, but as a contractor via their own limited company paying a dividend as opposed to earnings which would incur less Income Tax and no payment of National Insurance and was cited in the press release[7] as the anomaly being corrected.
Case law — judge Malachy Cornwell-Kelly has observed that there is "considerable case law on this subject"[10] — refers to the exercise of formulating such a contract as a "statutory hypothesis":the legislation enacts a statutory hypothesis and asks one to suppose that the services in question were provided under a contract made directly between the client … and the worker ….
The responsibility for determining and deducting the correct rates of Income Tax and National Insurance lies with the worker or company but under the Finance Act 2017, where a public authority engages the worker, the responsibility for making this determination and deducting the correct amounts transfers to the public authority for payments made on or after 6 April 2017.
[19] There has also been significant criticism of blanket approaches in national newspapers - both in terms of the lawfulness of the practice and asserting that it is driving workers into loan schemes.
[21] On 15 June 2009 in the House of Commons Labour MP Terry Rooney (Bradford North) asked the Chancellor of the Exchequer "how many investigations concerning IR35 were launched in each of the last five years; and how many of them resulted in (a) prosecution, (b) an increase in tax due and (c) no further action".
[24] On 6 Jan 2004 Dawn Primarolo was asked by the Shadow Paymaster General Mark Prisk MP about additional revenue secured from investigations under IR35.
She replied that "Establishing whether or not the intermediaries legislation applies is undertaken as part of the Inland Revenue's Employer Compliance Review programme.
[21] In May 2009 the Professional Contractors Group received a reply to a request under the Freedom of Information Act to HMRC, asking just how much tax revenue IR35 had in fact raised for the exchequer.
The reform was introduced by HMRC to "ensure that individuals who work through their own company pay broadly equivalent taxes as employees, where they would be employed if they were taken on directly".
[30][31] HMRC estimated it raised an additional £550m in income tax and National Insurance Contributions in the first year following the introduction of the reform.