IR35
IR35 is a term used to denote United Kingdom tax legislation designed to tax "disguised employment" at a rate similar to employment. In this context, "disguised employees" means a worker who receives payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client. Before IR35 was introduced workers who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company. Company profits could be distributed as dividends, which are not subject to National Insurance payments. Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands.
In 1999, as part of that year's Budget, the UK's Chancellor of the Exchequer, Gordon Brown, announced that measures would be introduced to counter tax avoidance by the use of so-called personal service companies. Properly known as the "intermediary's legislation", it is more commonly referred to by the number of the press release in which it was announced, IR35. It came into force throughout the UK in April 2000. Although it was part of that year's Finance Act and was not law at the start of the Financial Year, the Act backdated its commencement to April 6th 2000. The legislation has been consolidated in the Income Tax (Earnings and Pensions) Act 2003 and in the Statutory Instrument Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727.
Historically, it had been advantageous for the owners of a small company to take all of their wages in one month, thereby only incurring NI contributions once (up to the monthly ceiling) instead of suffering that burden every month. This ploy had been circumvented some years prior to the introduction of IR35 by imposing NI on the total annual income of directors as if it were spread over the year, even if only paid by one payment.
