The Original IR35 rules

The contractor tax known as IR35 (named after an Inland Revenue publication) has existed since April 2000 – see Sch.12 Finance Act 2000.

Under the rules a company contractor (‘PSC’), whose deployed individual provides personal services to the hirer, is obliged to assess its working relationship with its hirer clients. If there would be an employment relationship (between the hirer and the individual) were it not for the existence of the company and any agency involved, there is a ‘deemed employment relationship’ for tax purposes.

The rule extends to contractors operating through partnerships. Whether there is a deemed employment relationship is determined by considering the law around employment status – a notoriously challenging area.

HMRC may reach a conclusion that is different from the contractor’s opinion even if supported by legal advice. Liability follows the outcome as to who is correct, ultimately determined by a Tax tribunal or higher court.

Where there is a deemed employment relationship the PSC must account to HMRC for employment taxes on 95% of the income earned by the PSC from that relationship.