The IR35 legislation has been brought into the spotlight again recently due to the media attention surrounding Christa Ackroyd's case.

The basic mischief behind the rules is to prevent the avoidance of income tax and NICs by the insertion of an intermediary 'personal service company' between an employer and employee. Where the relationship between the individual and underlying client (ignoring the intermediary company) is one of employment then (in the private sector) the intermediary company must account for PAYE and NICs on the money received from the client.

From April 2017, the burden has shifted to the client where that client is in the public sector. In basic terms, it is the public sector client (rather than the intermediary) that must decide whether the IR35 rules apply and, if they do, account for the PAYE and NICs.

One of the main problems with the IR35 legislation is the uncertainty in its application. This is due to the more general uncertainty in relation to the test of whether someone should be regarded as an employee or a self-employed contractor. The test involves considering a wide range of factors which have evolved in case law over many years. To illustrate this, another IR35 case was published around the same time as Christa Ackroyd's case (MDCM v HMRC) which was set in a different industry (construction) but a number of the factors in the test for an employment relationship were similar (e.g. no right of substitution; overall control). In MDCM the tribunal found that the relationship was not one of employment and therefore IR35 did not apply. In many of these cases, the decision could turn either way.

This is an area in which HMRC appear to be bringing further challenges. For the moment, the problem is mainly that of the individual and their personal service company, albeit that the client/employer may well find themselves involved in any dispute for evidence purposes. However, on 18 May 2018, the government published a consultation paper about the use of personal service companies in the private sector. The key suggestions include bringing the private sector within the same public sector regime as described above and providing more clarity on whether an engagement will or will not fall within IR35. It is expected that changes will be brought into effect from April 2019.