The IR35 is an anti-avoidance press release by the Inland Revenue formulated for Personal Service Companies (PSCs). A personal service company, a private limited company, has been defined by the Inland Revenue as one that has been created as an intermediary and the owner him/herself works as the employee of such a company. The PSC invoices the actual employer, the client, for the service provided.

The most usual sorts of intermediary are service companies or partnerships that are normally under the control of the employee. The employee can then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NICs so the employee will pay less in NICs than either a conventional employee or a self-employed person.

If there is more than one intermediary between the client and the employee, any intermediary that makes payments direct to the employee may be affected. However, the intermediary with the closest link with the employee will normally be the intermediary responsible for complying with the legislation.

According to the legislation, the concerned worker of the PSC will have to take an Employed or Self-employed test and file an income tax return based on the result of the test. If he fails to qualify as a self-employed person, s/he will be considered as taxable under Schedule E. The employees of the business have no concern with the taxation procedure until they hold lower than 5% of the shares of the PSC.

The following deductions are tax allowable for PSCs under the IR35 regulation:

• 5% of the income from tainted contracts (relevant contracts) of the PSC, to cover the running expenses of the business.
• Salary to the owner of the PSC and other employees.
• Qualifying business expenses.
• Class 1 Employer’s and Employees’ NIC and PAYE.

A violation of the rules or delay in filing the returns may attract the Inland Revenue to your doorstep, which can lead to serious circumstances.