On 9th March 1999, HMRC issued a bulletin named IR35, detailing how they were going to close the loophole that allowed contractors to avoid paying tax and NICs by using intermediaries, such as personal service companies, composite companies or business partnerships. Essentially, IR35 affects all contractors who do not meet the Inland Revenue’s definition of ‘self-employment’.
IR35 denotes the UK tax legislation designed to tax ‘disguised employment’ at a rate similar to normal full-time employment.
The intention of IR35 is to ensure that if the relationship between a contractor and their client would have been one of employment, had it not been for the introduction of an intermediary, the contractor pays tax and NICs on the same basis as that of an employee of the client
Previously, individuals could provide their services to a client company via an intermediary such as a service company thus enabling the client to make payments to the company without deducting PAYE or NICs. The worker would then receive the money from the intermediary company in the form of dividends instead of a salary, thereby reducing the NICs. HM Revenue & Customs (HMRC) have clearly defined what a personal service company is and have also clarified that other entities employing the services of individuals who work as disguised employees are also caught by IR35