IR 35

“IR35” is a piece of tax legislation announced in 1999, which took effect from April 2000. The legislation means HMRC can tax some contractors as though they are employees of their end clients. Contractors caught by IR35 pay significantly more tax reducing their take home pay by up to 25%.

The introduction of the tax was to tackle tax and National Insurance avoidance schemes through the use of intermediaries, such as Partnerships or Personal Services Companies (PSC). Contractors often use a Limited Company as a PSC to obtain work either direct from an end client or via an agency. HMRC’s view was that a large number of IT Consultants, Engineers, non-executive directors and “one man band companies” were often treated as self-employed when in fact they should have been treated as employees of the end Client.

The Revenue argued that if the agency or the PSC were removed, a large number of contractors would really be “disguised employees” who should be included on the client payroll and have tax and NIC deducted each month.

Potentially all contractors can be caught by IR35 and will have to pay tax as a ‘deemed employee’. The exceptions are contractors working through PAYE umbrella companies, such as OrangeGenie, and those running their own limited company who are genuinely ‘in business’ and able to meet certain tests laid down and tested in the courts.

The financial impact of IR35 is significant for the contractor, since those caught by IR35 pay significantly more tax. A contractor caught by IR35 will typically receive 25% less in their pocket each month than a contractor who falls outside IR35.