The IR35 legislation was introduced in 2000 to counter what was seen by HM Revenue & Customs (HMRC) as an abuse of the PAYE Regulations by contractors arranging their affairs through limited companies. The legislation is not intended to catch the genuine freelance contractor who works for many different clients and/or provides equipment or materials as well as labour. Or who does not have to provide a personal service, but where the contractor works in a similar manner to an employee providing his or her labour only services in return for remuneration without a significant financial risk, IR35 requires the limited company to apply PAYE and NI to the relevant fees.
Historically, HMRC has not had the resources to properly police the operation of IR35, but this has now changed with the introduction of 4 regional investigation teams looking specifically at IR35. Legislation was also introduced in 2013 to further strengthen the existing rules. If a contractor is found to be within IR35 without having applied the rules correctly, HMRC can recover lost PAYE and NIC going back 6 years if they believe the contractor has not taken adequate steps to consider IR35, even back to 2000 where deliberate action has been taken not to apply IR35 knowing that it probably applied.
For further information on how the HMRC applies IR35, seek advice from an experienced specialist.