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The implications of HMRC’s rules known as ‘IR35’ have been around for a number of years.

Prior to the introduction of the IR35 rules in 2000, there had been a growing practice of workers leaving their jobs as an employee, setting up their own limited company (generally with the worker being the sole director) and immediately returning to their former employer as a contractor, working on behalf of their newly formed limited company - known as a Personal Service Company (PSC) - to carry out the same work that had previously been performed as an employee.

Under these arrangements both the worker and their former employer were happy as this arrangement enabled the worker to retain more of the income that would have previously been taxed as an employee and the former employer did not have to pay employers National Insurance Contributions (NIC) or worry about any of the other obligations associated with being an employer (sick pay, holiday pay etc).

As the tax benefits of such arrangements became apparent to both worker and engager, it wasn’t long before businesses were engaging a number of workers via similar arrangements.

Understandably, HMRC were not happy due to the amount of tax and NIC that was being lost.

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This article was written by: Tony Willetts, Tax Enquiry Solutions

Disclaimer - all information in this article was correct at time of publishing.

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