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IR35 - Details You Should Know

IR35 It seems that with the proposed MSC legislation looming, there has been has been a resurged interest by contractors in forming their own Limited Company.
Please be aware though that whilst the proposed legislation will almost certainly spell the end of Composites Companies, IR35 will certainly still be in place to regulate the employment status and therefore the tax efficiency of those that choose PSC's.
Come April 2007, Composite Companies and other MSC's will be wiped out, leaving contractors with the option of using:
  • Umbrella Companies,
  • Agencies, or
  • Personal Service Companies (PSC's)
Unfortunately the PSC option is further jaded by the Intermediaries legislation known as IR35.
The legislation is designed to increase the Tax and NIC Earnings from contractors who operate their own PSC. In the old days, many freelancers' had discovered that it was more tax efficient to distribute the majority of income as dividends, rather than by salary.
Put another way, up until April 2000 many contractors used the 'wrapper' of incorporation as a way to gain the various beneficial Tax and National Insurance arrangements that were legitimately open to those working through their own Limited Company.
In a nutshell the IR35 rules sought to re-dress this "dividend remuneration discovery" by making the decision whether to work through a service company or as a direct employee broadly neutral in terms of the Tax and NIC's which is payable.