IR35

IR35 is the term given to the controversial government legislation which was introduced by the government on 6th April 2000 to increase the level of social contributions paid by IT contractors and to remove the contractors right to dividend pay.

IR35, under Schedule 12 of The Finance Act 2000, intended to bring the level of tax on people working through personal service companies in line with tax on the earnings of payroll staff.

Prior to IR35 there had been concern about the hiring of individuals through their own service companies and the government felt that some computer contractors exploited the financial advantages offered by a corporate structure. Back then it was possible for someone to leave work as an employee on a Friday and return the following Monday doing the same job as an indirectly engaged 'consultant' paying reduced tax and national insurance. This was deterred with the introduction of IR35.

It is currently estimated that around 80% of IT contractors are caught by IR35 as it is now more difficult and financially less beneficial for contractors to work under their one limited company like they once did. IR35 legislation has not only had an impact on contractors but on recruitment agencies across all sectors by stagnating the jobs market as workers opt for permanent employment to avoid, what many believe is "an unfair tax system".

Since April 2000, anyone who was working via an intermediary, such as a company or partnership, was caught by new rules if they failed the 'IR35 test'. The Inland Revenue tests contracts to determine which category of contractor the IT worker falls under. Computer contractors are either deemed (a) genuine contractor or (b) 'akin to employed'.

(A) If workers are a genuine contractor, i.e. passed IR35, they can continue to pay themselves a small salary and take the rest of their income in the form of dividends, which don't incur national insurance contributions.

(B) If they fail IR35 and are deemed 'akin to employed', that is, they appear more like an employee than a genuine consultant, they can no longer take dividends from the company. In comparison to the first method, this will result in a reduction of approximately 8- 15 % on their net income.

IT contractors have reacted in a number of ways. Some contractors took permanent work, others went overseas, and some have chosen to ignore IR35 only to be caught by the Inland Revenue. Other contractors have chosen to continue enjoying the freedoms of contracting but have sought a new way to work. Many have discovered Prosperity4. Daily, more and more computer contractors' are joining Prosperity4 which is currently the only Inland Revenue approved IR35 solution.