On 9th March 1999, the then Inland Revenue issued a press release detailing how they were to close the loophole that allowed freelancers and contractors to avoid paying large amounts of tax and national insurance by using a personal service company, composite company or business partnerships. This press release was called IR35, and the legislation it announced has generally been referred to as IR35 ever since.
The government identified contractors as ‘tax avoiders’, due to the tax saving benefits they enjoyed from working through a Limited Company/Personal Service Company, whilst their underlying status was clearly that of a “deemed employee” The IR35 legislation was implemented in April 2000.
IR35 has resulted in increased Tax, NI liability and administration for those contractors using a Limited Company. IR35 made the use of Umbrella Companies significantly more attractive and more recent “Legislation to tackle Managed Services Companies” introduced in the Budget 2007 increased the appeal of umbrella companies further.
When you are employed via a PAYE Umbrella Company, IR35 does not apply to you, as its a test of false self-employment.