What is IR35? The United Kingdom's tax legislation, designed to tax 'disguised' employment at a rate similar to employment. The reform was unveiled in 1999 by the UK tax authorities. A regulation change which came into force in April 2021 meant medium and large businesses in the UK must set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves. Contractors found to be within the scope of the legislation – i.e. inside IR35 – will have to pay more tax than they might expect.
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees and are able to slash their tax bills by billing for their services through Personal Service Companies (PSCs), which are taxed at lower corporate rates. The measures first came into effect in the UK public sector in 2017. The British government hoped the reforms would recoup £440 million (c $486 million) by bringing 20,000 contractors in line.
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2 billion (c $1.33 billion) a year by 2023. Both public and private sector reforms had been set to be repealed in September 2022, but the new government quickly U-turned just weeks later, when Jeremy Hunt replaced Kwasi Kwarteng as chancellor of the exchequer. Now both are back on the books.