IR35

IR35 was introduced by HMRC in 2000. The abbreviation has remained and IR35 has become one of the most difficult parts of taxation legislation.

IR35 was introduced simply to increase tax revenues to the Treasury. It argued that many people were commonly referred to as ‘contractors’, but were, in fact, really employees of their own limited company or business. They were not, therefore, self employed or running their own business.

In these circumstances the Treasury argued that contractors should be taxed in the same way as normal employees and the quotation from HMRC at the time was ‘The purpose of the new rules (IR35) is to remove opportunities for the avoidance of tax and Class 1 national insurance contributions by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker’.

The difficulty with IR35 is that it is trying to use generalised situations and impose them on different business models to invoke fairly punitive tax and national insurance charges.

It is not helped that cases which reach the Courts alternate in finding in favour of HMRC and the tax payer and, therefore, do not give a clearly defined lead on providing guidance as to whether a particular case is caught by IR35 or not.

How are Contractors affected by the IR35 rules?

Tax payers who set themselves up as consultants generally using a limited company and often with the one person acting as the owner/manager of that limited company working for one client, are likely to be caught by the rules. In addition, those who are following the same course as the self employed (as a sole trader or partnership) would also be within the IR35 regulations, although there are not many cases which have reached the courts covering the self employed.

You will find many articles in this section to give you an understanding of IR35 and its implications. Due to its complicated nature we suggest you call our Taxation teams who have had considerable experience in the types of structure and contracts which may be attacked by HMRC using IR35 and give advice over the aspects which can often be included for the benefit of the contractor.