IR35 provisions. Flawed application, or a sea-change in “contractor” classification?

IR35 is the United Kingdom’s anti-avoidance tax legislation designed to tax disguised employment at a rate similar to employment. Its application has been the subject of much recent case law as HMRC has belatedly attempted to address the common practice of contractors, who were “employees” in all but name, self-designated themselves to their tax advantage and to the exchequer’s disadvantage. The clampdown was intended to reduce the prospects of a servant successfully claiming that they were merely a contractor, so paying less tax and National insurance Contributions than they would if they were an employee.

Ready Mixed Concrete Ltd v Minister of Pensions [1968] 2 QB 497 has provided the criteria by which employees have been so categorized since that case. If:

  1. A servant agrees to a perform a service for a company in exchange for remuneration;
  2. A servant agrees, expressly or impliedly, to subject himself to the control of the company to a sufficient degree to render the company his “master,” including control over the task’s performance, means, and time; and
  3. the contractual provisions are consistent with ordinary contracts of service,

then the servant is deemed to be an “employee” and not a “contractor”.

Recent evidence indicates that to avoid any possibility of being litigated against, businesses are adopting a blanket IR35 assessment designating and taxing contractors as “employees”. For instance, Network Rail has recently taxed 810 out of 817 contractors (over 99%) working for the rail infrastructure provider as if they ere employees of the firm, regardless of the facts and circumstances of the individuals. Clearly, each individual designation should be made on a case-by-case basis and any that are not may be incorrectly designated.

The proportion of those who have been caught by the IR35 legislation in the above example far exceeds the government’s estimate that only one third of contractors would fall within its scope. The disparity between the actual and expected percentages suggests that many genuinely self-employed contractors are incorrectly being classified as employees for tax purposes, increasing both the employers’ and employees’ tax burden.

While most commentators agree that eradication of the abuse of the taxation system is a legitimate goal, critics of the rigid application of the categorization argue that it will increase the cost of hiring contractors and impede workforce flexibility. The NHS has seen many skilled contractors leave as it applied a blanket categorization, and the construction industry fears the same could happen to it for the same reason.

HMRC’s view is that the off-payroll working rules do not affect the genuinely self-employed. However, it seems increasingly that it is the contractor’s burden to prove to their paymasters that they should be designated as such. If they are unable to do so, the default position seems that increasingly they will be deemed to be “employees”.


Meaby & Co are lawyers experienced in all employment issues. Should you require advice on employment status, or indeed any aspect of employment law, please contact Chris Marshall on 0207 703 5034 or