The IR35 legislation is aimed at what HMRC calls “disguised employees”. These are individuals who attempt to use an intermediary, usually their own limited company (a “personal service company”) to avoid paying tax. Before the IR35 legislation closed the loophole in the law, people could set up a limited company and then hire out their services in that company’s name to do the same job as an employee. Working through a company significantly reduced their tax bills, as well as the employer’s national insurance bill of the “client” who would otherwise have been their employer.
The IR35 legislation aims to prevent this form of tax avoidance by differentiating between individuals who operate as genuine contractors, and those who work as independent entities but with the working conditions of employees. HMRC can launch IR35 enquiries and inspect contracts and arrangements, and if they decide that a self-employed contractor is “inside IR35” i.e. a “disguised employee”, they can require payment of backdated tax, national insurance, interest and possibly a penalty. It’s therefore essential that self-employed contractors operating through limited companies are aware of this and check their contracts carefully to ensure compliance with the IR35 rules, or seek help to do this.
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