There are many self-employed professionals in the UK who offer their services to customers through intermediary companies. These companies are known as personal service companies, and come under the purview of intermediaries legislation.

Understanding the legislation

The legislation was introduced in 2000 with the aim tackling disguised employment. Primarily, intermediaries legislation, also known as IR35, requires contractors providing services through personal service companies and intermediaries to pay tax and National Insurance contributions as other employees.

There is evidence to support service providers are no complying with this piece of legislation. While the number of paying taxes under IR35 has remained stagnant, there is a significant increase in the number of personal service companies. In 2012-13 tax year, the government estimated there were about 265,000 personal service companies in the UK. This number has increased from the previous year by 65,000 and is expected to keep growing.

However, there are problems identifying whether a personal service company falls under the purview of IR35.

Penalty for non-compliance of IR35

If you work outside IR35, it is best to get your contract reviewed to be completely certain and your services are indeed outside the ambit of IR35.

The penalty for non-compliance is extremely steep, and can run in thousands of pounds.

In case you want to work outside IR35, you should be able to prove you can work independently. In other words, your client should have no control over the way you perform your duties. In case HMRC finds you were falsely operating outside IR35, you will have to pay the previous underpaid tax, a penalty equivalent to the underpaid tax, and interest for the time you held onto the additional cash.

There is a 5-year investigation window that allows HM Revenue and Customs to minutely go through your accounts for that period of time. If you are found falsifying your IR35 status, be ready to pay a stiff fine.

Penalties imposed for operating falsely out of IR35 are expensive, time consuming and stressful. This is especially true if you case makes its way to a tax tribunal and court. Hence, it is advisable for contractors and professionals offering services to adopt best practices remain either outside the scope of intermediaries legislation or within it.