IR35 was first introduced by HMRC on 6th April 2000 to combat tax avoidance by workers supplying their services via a limited company (‘Personal Service Company/PSC’), who, but for the PSC, would be considered an employee (and pay increased levels of Income Tax and NIC’s as a result). IR35 is now 20 years old and continues to grow and grow in terms of its notoriety.
Effectively, such workers were ‘disguised employees’ and benefited from a net saving in tax of up to 25% when compared to a directly employed individual, including the ability to claim a number of tax-deductible expenses not ordinarily available to an employee. The engaging organisation also benefits from significant savings as they do not have to pay employer NIC’s, nor do they have to offer any employment rights or benefits.
What if HMRC decides IR35 Rules Apply?
If a contractor is deemed to be inside IR35 (and therefore labelled by HMRC as a ‘disguised employee’), the contractor will have to pay income tax and NIC’s as if they were an employee paid via PAYE and and the PSC will face a financial penalty. Therefore, the potential liabilities for a PSC are huge. It is very important that they have a clear understanding of IR35 so as to ensure that they do not fall foul of it. However, this is by no means an easy task given that ever since its introduction, IR35 has been criticised as being highly complex and confusing.
An arrangement is likely to be caught by IR35 if, amongst other things, an individual provides their service to the end client (or is obliged to do so); those services are provided under arrangements involving a PSC; and the circumstances of the arrangement are such that if they had been made directly between the end client and the individual, the individual would have been held to be an employee.