The Law and its history
IR35 is legislation that was originally introduced in 1999. It operates around the use of PSCs (Personal Service Company – one-man limited company contractors) and originally put the onus on the contractor to prove that their PSC is not disguised employment, with any tax bill resting with the PSC. IR35 is based on complex case law but put simply, the fulfilment of JUST ONE of the following three tests will mean that there isn’t disguised employment;
1) Test for personal service 2) Test for mutuality of obligation 3) Test for control
As stated in the Montgomery v Johnson Underwood  CA case mentioned three conditions need to be present for a contract of employment. It therefore follows that if ONE of the tests being mutuality of obligation, personal service or control are not present, no contract of employment can exist.
With the introduction of the reforms there is liability now throughout the supply chain so it is advisable to obtain an independent review by an accountant who specialises in IR35 contracts.
Significant financial impact to all parties
The financial benefits achieved through working via a PSC can be significant. This is primarily derived through the application of dividend income, which has a lower tax rate, as opposed to salaried income at the higher tax payer rates. PSC’s benefit the supply chain as employment on costs are eliminated and they benefit the contractor in that they can take their income tax-efficiently. Unfortunately, these benefits can motivate the supply chain, end hirer, agency and the contractor to potentially apply the use of PSC inappropriately. However, should the contractor be deemed inside the scope of IR35 incorrectly, this can affect their net take home in the region of 13-14% per week.
HMRC have indicated that they are aware of this inappropriate use of PSC’s and, as such, disguised remuneration. There is a greater focus by HMRC on their legitimate use and HMRC have introduced a TAAR (Targeted Anti Avoidance Rule Task Force) indicating that it will be aimed at the mass incorporation of personal service companies”.
The main concerns are as follow:
31 Days – on request by the “Fee Payer” the public-sector body must notify in writing their IR35 decision and on written request provide their reasoning for their decision. If they fail to do this the fee payer liability moves up the chain to the public-sector body
Duty of care – If the end client fails to:
(a) comply with their duty to provide a view within the time allowed or
(b) fails to provide a written response about their reasons for reaching their conclusion within the time allowed or
(c) complies with (a) but fails to take reasonable care in reaching that view then the client becomes the fee-payer and assumes responsibility for any and all PAYE / NICs due.