This year marks the 25th anniversary of IR35 – the UK’s off-payroll working legislation. Over that quarter-century, few areas of tax law have caused as much discussion, disruption, or adaptation for both businesses and contractors.

Why IR35 was introduced

In the late 1990s, the use of personal service companies (PSCs) became increasingly common among contractors. This structure allowed individuals to draw income as dividends, which attracted lower tax and National Insurance contributions (NICs), ultimately reducing the Treasury’s tax income.

In response, the government introduced the IR35 rules, designed to determine whether a contractor is genuinely self-employed or a ‘disguised employee’. The goal was simple: to ensure fair taxation across different forms of working relationships.

Who is, and who is not, an employee has been the subject of much consideration by tax tribunal, often in some very high profile cases.

Reform and evolution

Since its inception, IR35 has evolved significantly. A major turning point came in 2017, when the Off-Payroll Working Rules were applied to public sector bodies; this was extended to  large and medium private sector businesses from April 2021. The key change was the shift in responsibility: determining employment status moved from the contractor’s personal service company to the engaging organisation.

To support this process, HMRC introduced the Check Employment Status for Tax (CEST) tool – an online system providing immediate status determinations. Where a worker is deemed employed under IR35, the fee payer must apply PAYE and NIC as if they were a direct employee.

While the reforms have caused widespread disruption, it’s fair to say that HMRC is taking a more pragmatic and considered approach to enforcement – a welcome development that could help the market function more smoothly in time.

Looking ahead

The landscape continues to shift. Major reforms are already planned, including new umbrella company legislation due to take effect in April 2026, and ongoing discussions around a potential single worker status under the forthcoming Employment Bill.

At the same time, reports suggest the government is seeking new ways to raise revenue. While it remains to be seen what the November Budget will bring, further changes affecting employment and self-employment taxation cannot be ruled out.

Preparing your business

Despite the evolving rules, the use of subcontractors shows no sign of slowing – if anything, cost pressures and flexibility demands have increased reliance on them.

Businesses should ensure they have robust assessment and assurance processes in place when engaging subcontractors or off-payroll workers. HMRC expects employers to take reasonable care when assessing employment status, and to demonstrate that due diligence has been exercised throughout their supply chain.

With the next wave of reform approaching, it would be wise to review internal processes, revisit status determinations, and seek advice where needed.

If you’re unsure how the upcoming reforms might affect your business, please get in touch with Fiona Phillips on (01482) 325242 or email Fiona.phillips@andrewjackson.co.uk