Highly skilled workers who provide services to clients through a personal services company are likely to fall within the scope of the IR35 regime if analysis for tax purposes suggests that an employment relationship rather than a contract for services exists.

A consultant operating through a personal services company was engaged almost exclusively by a client from April 2000 until February 2003. He carried out services personally with no unqualified right to provide a substitute, he was subjected to supervision and quality control (including regular appraisals). His relationship was found to be inconsistent with that of a truly independent contractor. Greater weight was placed on the reality of the arrangements between the parties than on written documentation stating that the parties did not intend to create an employment relationship. Accordingly, IR35 operated to impose PAYE obligations on the personal services company.

This may be advantageous for many large employers engaging skilled consultants. The effect of IR35 is to deem the individual consultant to be an employee of the intermediary (their personal services company) rather than the end user. Accordingly, liability for deducting income tax and national insurance contributions under the PAYE system will fall on the personal services company rather than the client. (Dragonfly Consultancy Ltd v HM Revenue & Customs, High Court)