The Objective of IR35

Quite simply, IR35 is in place to allow HMRC to target and retrospectively tax, penalise and fine those contractors who are treated and act like employees yet pretend they aren’t yet but whom claim the rights, including the more efficient tax breaks, afforded to genuine owners of companies. This is where the term ‘disguised employee’ comes from and it is they who are the target of HMRC.

Most contractors, freelancers and consultants tend to provide their services through an intermediary company, which is most cases was their own limited company, known as a Personal Service Company (PSC), with others choosing to do so via an agency who managed it on their behalf or on the agencies payroll under PAYE.

A ‘disguised employee’ is someone whom they believe is manipulating the use of an intermediary company to increase their take home pay, often via distributing company profits as dividends which are not subject to NIC payments at the same rate as employees, claiming various expenses to lower profit, and via splitting ownership of the company with family members so they can each utilise their tax free allowances.

Therefore, being outside of IR35 is of considerable benefit to a contractor and increases their take home pay, but the risk of not operating correctly to obtain the benefit can lead to up to six years of back taxes, interest and penalties being applied by HMRC, who had estimated that they would benefit to the tune of an extra £300 million per year, split £220 million via increased NICs and an additional £80 million in income tax.

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