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What is IR35?

IR35 is the way in which the taxman closed a loophole that was allowing many contractors and freelance professionals to avoid paying large amounts of tax and National Insurance Contributions (NICs)

The IR35 tax rules were designed to prevent tax avoidance by workers using personal service companies, composite companies and partnerships – these have all come to be known as "intermediaries".
Workers had been using intermediaries to reduce their tax and NIC liabilities when really they should have been paying tax as if directly employed.
It became common for someone to stop being an employee on the Friday and to start as a contractor on a Monday. They sat at the same desk and did exactly the same job, but were paying much less tax than the people around them.
The new tax rules said that, if an intermediary was being used and the employment relationship between the worker and their client would have normally been direct employment, the worker should pay tax and NICs like any other employee.

Why was IR35 introduced?

During the 1980s and 1990s it became very common for workers in some sectors – particularly IT, engineering and construction, where sub-contracting is common – to use an intermediary and avoid paying a significant amount of tax and National Insurance Contributions (NICs).

Towards the end of the 1990s, the then Inland Revenue and Treasury calculated that potentially billions of pounds in tax and NIC revenues were being lost to the Treasury by the practice of working through intermediaries, or what has also become known as "contracting".

So IR35 was introduced. The motivation behind the legislation was threefold:

The Treasury and Inland Revenue considered the "lost" tax and NICs as a potentially significant injection of cash into public sector finances.
There was the feeling that the contracting sector was not contributing fairly to public sector resources. Why should some people enjoy the same benefits of health, education, policing and other services, without having to contribute a fair amount towards them?
Why should different workers doing the same work – in many cases for the same client/employer – be treated differently and receive vastly different levels of remuneration, simply because one had a clever accountant?

The main organisations affected by IR35 are listed below:

Employment Agencies
Contractors
Husband & Wife Companies
Umbrella Companies
Composite Companies
Clients

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Business Solutions, Technology Consulting, Remote Infrastructure Managed Services, Human Capital Management, Consulting, business consulting

What is IR35?

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