IR35
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IR35 is a term used to denote United Kingdom tax legislation designed to tax "disguised employment" at a rate similar to employment. In this context "disguised employees" means workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client. Before IR35 was introduced workers who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company. Company profits could be distributed as dividends, which are not subject to National Insurance payments. Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands. (This latter practice is under separate attack, see S660A.)
Background and contents
In 1999, as part of that year’s Budget, the UK’s Chancellor of the Exchequer, Gordon Brown, announced that measures would be introduced to counter tax avoidance by the use of so-called personal service companies. Properly known as the “intermediaries legislation”, it is more commonly referred to by the number of the [press release] in which it was announced, IR35. It came into force throughout the UK in April 2000. Although it was part of that year's Finance Act and was not law at the start of the Financial Year, the Act backdated its commencement to April 6th 2000.
The stated aim of the measure was to prevent workers from setting up limited companies via which they would work effectively as employees, but saving on tax. The so-called “Friday to Monday” scenario, that it was possible for a worker to leave a job on Friday and returning to do the same work for the same company on Monday, but as a contractor via their own limited company, paying a lot less tax, was cited in the [press release] as the anomaly being corrected. In such a scenario, HM Revenue and Customs would be allowed to “look through” the contractual arrangement between the worker’s company and the client company and to formulate a “hypothetical contract” which showed that the worker was a “disguised employee”. The fee paid to the worker’s company would then be taxed as a salary.
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