What is IR35?
What you need to know about IR35
IR35 is the Chancellor's weapon against tax and National Insurance contributions (NICs) avoidance through the use of an intermediary such as a service company or partnerships. Essentially, IR35 affects all contractors who do not meet the Inland Revenue's definition of 'self employment'.
Previously, intermediaries such as service companies could be set up to provide the services of a worker to a client company enabling the client to make payments to the company, without deducting PAYE or NICs. The worker would be able to take payments from the company in the form of dividends instead of a salary, thereby saving NICs.
On 9th March 1999, the Inland Revenue issued a bulletin named IR35, detailing how they were to close the loophole that allowed contractors to avoid paying considerable amounts of tax and NICs by using a personal service company, composite company or business partnerships.
The government recognised all UK contractors as being potential 'tax avoiders', due to the tax saving benefits they enjoyed from working through a Limited Company/Personal Service Company, whilst their underlying status was clearly that of a “deemed employee”. IR35 was formally introduced in April 2000.
HM Revenue & Customs (HMRC) have clearly defined what a personal service company is and have also clarified that any other entities employing the services of individuals who work as disguised employees are also caught by IR35.
If you contract your services to one client and are acting as an employee, you cannot avoid IR35 – but you can maximise your earnings.
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