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What is IR35? Dont get caught by HMRC


First things first. IR35 is a legislation that was proposed by the Chancellor in 1999, and introduced on 6th April 2000 to counter tax avoidance and National Insurance (NI) avoidance schemes.

This legislation was introduced to curb / tackle / tax disguised employment. It means, this legislation was for those permanent employees who were working as “Contractors” in the UK, trying to avoid tax.

IR35 only affects those contractors who try to avoid tax, using intermediaries such as Personal Service Company (PSC) or Limited Company.

Contractors use limited companies (PSC) for contracting, and at times they deal directly with the client and more often through a recruitment agency.


Steve is a Contractor, and he has got a 3 month contract from XYZ IT.  Steve has his own limited company in the name of Steve Ltd. Now, he could either work directly for XYZ IT via Steve Ltd, or through a recruitment agency.

If Steve Ltd worked directly with XYZ IT then, it would look like:

Steve Ltd is providing service to XYZ IT. Steve will provide his expertise / service on behalf of Steve Ltd to XYZ IT.

After the work is complete, Steve Ltd will raise an invoice to XYZ IT and XYZ IT will pay to Steve Ltd’s business bank account, and not in Steve’s personal bank account. Steve Ltd will pay salary to Steve after deducting allowable expenses.

To increase take home pay, Steve Ltd will distribute profit as dividends (which are not subject to National Insurance (NI) contributions. Limited Companies or PSCs are often 1 man companies, but many Contractors use their family member as a second Director or Secretary to further increase their take home pay, by splitting payments.

The only difference in the second scenario is that, Steve Ltd is contracting via a recruitment agency to work for XYZ IT. Here, Steve Ltd will bill recruitment agency, which will then bill XYZ IT. Upon receipt of payment from XYZ IT, recruitment agency will pay to Steve Ltd.

There are many Contractors (disguised employees), who should actually be working as employees and should be on client payroll and have tax and NIC deducted every month

To determine and pin point disguised employment is very difficult, since IR35 has a lot of grey areas. It depends on a lot of things, and it is only possible to get an idea of IR35 status after reviewing the contract terms and conditions.

Having said that, if you are a Contractor, it is your responsibility to ensure whether your contract falls inside IR35 or outside. If HMRC catches you, your take home pay is likely to get reduced up to 25%.

Financial implications are very high if you are caught inside IR35 and you’re to pay very high tax for that.

It is better to seek expert advice and NOT take any chances when it comes to IR35. 

If you need any assistance with IR35 or need a contract review, please feel free to write to us on and we will be happy to assist you.

Source: Self, Wikipedia

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Smit Shah

Smit is the Owner of, an avid blogger and likes to write about Contracting, SEO and Social Media.

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