IR35
IR35 is the bane of many a contractor’s life thanks to its clear as mud regulations. It is a common buzz word amongst agencies, providers and advisors, and strikes fear into the heart of many, but it needn’t be either scary or confusing!
During the period leading up to the late 1990’s, some tax savvy bods set a trend of people leaving permanent employment and the next day doing the exact same job in the exact same way for the exact same company as a contractor, but not paying the exact same levels of income tax. This became known as the “Friday to Monday” scenario.
The government became a bit concerned about the lost taxes caused by this trend, and were wary of contractors setting up their own company, or joining a company with other contractors simply to receive their income in a more tax efficient way. They decided that they needed to introduce some rules to control this pattern, so that the only people who could take advantage of the tax benefits of operating like this were those people who were genuinely working as self-employed.
So along came IR35. Its proper name is the Intermediaries Legislation, and it was announced by Gordon Brown, the Chancellor of the Exchequer at the time (1999). For those of you who are intrigued by the term IR35, it simply means that it was the 35th statement of the Inland Revenue in that year (see – this really is simple stuff!). Mr Brown announced that he was going to tackle the issue by introducing a series of laws to ensure that anyone who was operating through a limited company but was actually a ‘disguised employee’ of their client paid income tax and National Insurance on the full amount, rather than receiving their income in other ways, usually by means of company profits which do not attract National Insurance Contributions. The government claimed that they would collect £220 million each year in National Insurance Contributions that otherwise would not have been paid, and that their coffers would be swelling as a result.
So, what does this actually mean to you and us? And what’s happened since?
Firstly, let’s get the jargon right. A contractor who is a disguised employee would be ‘inside IR35’ – yep, you guessed it, caught by the legislation. A contractor who is not acting in the same way as an employee is ‘outside IR35’ and therefore not caught by the legislation.
