Making Sense of IR35

IR35 is a word used to describe two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

Such workers are called ‘deemed employees’ by Her Majesty’s Revenue and Customs (HMRC). If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.

Despite having been in force since April 2000, IR35 is heavily criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses. This is why Government sought to replace the original IR35 legislation with the new Off-payroll legislation, which was initially introduced into the public sector in April 2017, and extended to the private sector in April 2021. However, the original legislation is still in force for contractors who work for clients that are small, as defined by the Companies Act 2006.