During the 1980s and 1990s it became very common for workers in some sectors – particularly IT, engineering and construction, where sub-contracting is common – to use an intermediary and avoid paying a significant amount of tax and National Insurance Contributions (NICs).
The reasons behind IR35
Towards the end of the 1990s, the then Inland Revenue and Treasury calculated that potentially billions of pounds in tax and NIC revenues were being lost to the Treasury by the practice of working through intermediaries, or what has also become known as "contracting".
So IR35 was introduced. The motivation behind the legislation was threefold:
Firstly, the Treasury and Inland Revenue considered the "lost" tax and NICs as a potentially significant injection of cash into public sector finances. That′s why IR35 is still considered by some observers to be a revenue-generating exercise, or "stealth tax".
Secondly, there was the feeling that the contracting sector was not contributing fairly to public sector resources. Why should some people enjoy the same benefits of health, education, policing and other services, without having to contribute a fair amount towards them?
Thirdly, why should different workers doing the same work – in many cases for the same client/employer – be treated differently and receive vastly different levels of remuneration, simply because one had a clever accountant?
The legislation also covers family run or "husband and wife" companies where both spouses own a significant share in the business and income is shared between them. IR35 particularly applies when only one spouse is responsible for completing the fee-earning work.
To speak to one of our tax experts call 0800 434 6402.
