What is IR35?

Date: April 06, 2007

The IR35 tax legislation was intended to transform the taxation of freelance contractors.

The legislation means that HMRC can tax some contractors as though they are employees of their clients.  Contractors caught by IR35 pay significantly more tax reducing their take home pay.   

HMRC's intention was to tackle tax and national insurance avoidance schemes through the use of "intermediaries", such as Personal Services Companies (PSC), Managed Service Companies (MSC) or Partnerships.

Contractors often use the Limited Company as a vehicle to obtain work either direct from an end client or via an agency.  HMRC view is that a large number of one man band companies were often treated as self-employed when in fact they should have been treated as employees of the end Client based on the contractors work practices.   
 
HMRC argued that if the intermediary 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.

Since these regulations were introduced they have placed the responsibility for determining employment status squarely on the shoulders of the freelance contractor.  The poor drafting of the IR35 legislation added uncertainty to the administrative burden of those freelance contractors using their own limited company and made the use of Umbrella Companies significantly more attractive than in the past.