IR35: Countering Avoidance in the Provision of Personal Services
Budget Day 1999 news release IR35 announced the Chancellor's intention to tackle tax and NIC's avoidance through the use of intermediaries, to remove contracting individuals rights to dividend pay, and to bring tax and Class 1 National Insurance Contributions (NIC's) in line with those of traditional working employees.
The purpose of IR35 is to remove opportunities for the avoidance of tax and NIC's by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.
Intermediaries such as service companies could be set up to provide the services of a single worker to a client in circumstances where, if it were not for the service company, the worker would be an employee of the client. The use of service companies in this way allowed the client to make payments to the company rather than the individual, without deducting PAYE or NIC's.
The worker could then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NIC's so the worker paid less in NIC's than either a conventional employee or a self-employed person.
The Chancellor decided that avoidance of PAYE and NIC's in this way needed to be tackled in the interests of fairness.
IR35 places responsibility for complying with the rules on the service company or partnership, rather than on the client; and uses the existing tests that determine the boundary between employment and self-employment for identifying contracts affected by the rules.
The legislation applies to all individuals supplying their services through an intermediary such as a service company or partnership, and all individuals working for "composite" or "umbrella" companies.