IR35 is a piece of government legislation created to help distinguish genuinely independent contractors from those who are essentially disguised employees.
IR35 was introduced by HMRC in 2000 to tackle the problem of contractors working full time via their PSC to gain tax advantages.
Every contractor’s IR35 ‘status’ effectively determines their tax position with HMRC. End hirers are required to scrutinise the roles and responsibilities of every contractor they hire according to the rules laid down within IR35.
The outcome of a SDS completed by the hirer will determine whether a contractor is genuinely independent and bearing the risk of self-employment – and therefore entitled to tax advantages – or if they are essentially performing the role of a PAYE employee. If a contractor’s relationship with their end hirer falls inside IR35, they will be taxed according to PAYE. If it falls outside, they will be taxed as a Limited Company, where they can primarily withdraw funds as dvidends.