HMRC introduced the 'Intermediaries Legislation, commonly known as IR35, in April 2000.
The legislation was introduced to deter workers from operating as 'self employed', where they would normally be classed as regular employees.
HMRC sees this set up as a form of tax evasion. This is because limited company contractors can pay a lot less tax than employees, due to their ability to split their earnings between salary and company dividends (which have lower tax rates).
If youre investigated and your contract is 'caught' by IR35, HMRC will demand all tax and national insurance contributions on payments originally paid out as dividends.
If you work through your own limited company, you must be aware of this legislation and do everything possible to ensure that your contracts and working practices are in compliance with IR35.
What are the rules?
IR35 is very complicated, and the rules are set out in a combination of statues, HMRC guidance and case law. For the studious among you, you can read HMRCs full guidance.
HMRC uses a risk-based approach to assess IR35 compliance. Customers are graded as either: low risk, medium risk or high risk.