IR35 is the regulation introduced by the British Government to remove what it saw as a loophole for contractors to trade as limited companies to avoid tax and National Insurance Contributions, in circumstances where the individual worker would otherwise be an employee of the client for whom they work.
The aim was firstly to deal with tax avoidance, and secondly to protect workers who were forced to work as contractors by their employers, and were therefore without the normal benefits and entitlements of an employee, such as sick pay.
However, IR35 affects not only those who nominally work for themselves, but also those who are genuine freelancers. The All Party Parliamentary Small Business Group, a cross party group of MPs and Peers which liases between small business and Parliament, has recently released a report into freelancing in the UK.
The report found that IR35 is a serious problem for freelancers. There is no set agreement between the Inland Revenue and tax experts as to which type of taxpayer falls under the IR35 regime, and the uncertainty this entails is bad for business. The regulation costs business money as well – on average around £1,000 - £2,000, according to the Group.
The Group is therefore concerned that contractors will go overseas rather than try to cope with the unhelpful UK regime. It said in a statement:
"The government should carry out a detailed review of IR35 to ensure that the costs in terms of the impact on the freelancer market are justified by the benefits in terms of the taxation impact. There is little real evidence that IR35 has proved cost effective in terms of dealing with tax avoidance without also impacting genuine businesses."