IR35 is a UK tax legislation introduced in 2000. IR35 is a complex tax legislation which is easily misunderstood by many and especially misconstrued amongst those it affects the most.
Originally introduced by then Chancellor of the Exchequer Gordon Brown IR35 is essentially designed to close a loophole in the tax system where workers use the setup of a limited company structure to pay less tax. Despite a contract being with a limited company, the reality is more like an employer-employee relationship, the worker should, in fact, be taxed as an employee. This is referred to as a ‘deemed employee’.
Why was iR35 introduced by the government?
The purpose of IR35 is to identify deemed employees’ and ensure they are taxed correctly, however, IR35 can also impact those operating genuinely through a limited company structure due to current sensitive nature of the legislation.
This can save the engaging organisation a significant amount of cash as they no longer have to pay employers’ NICs of 13.8% or the Apprenticeship Levy of 0.5%, and it also means they do not have to offer any employment rights or benefits.
By definition IR35 impacts UK personal service companies (PSCs) – a term which has not yet been clearly defined by HMRC but, in broader terms, refers to limited companies with a sole or majority director/shareholder who provides the services of the company.
Exploiting the tax system in this manner is considered a form of tax avoidance which HMRC defines as “bending the rules of the tax system to gain a tax advantage that Parliament never intended.”
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