The official name of this much debated and disliked legislation is the Intermediaries Legislation (IR35) – Working through an intermediary, such as a Personal Service Company and it was introduced on 6th April 2000. Part of the aim of the legislation was to stop you setting up as a company to provide the service through this company and pay yourself in dividends.
The Tax Office aimed to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise (for tax purposes) be regarded as an employee of the client and (for NICs purposes) “employed in employed earner’s employment” by the client.
In plain English, it’s aim was to close a loophole whereby company A (“the intermediary”) bills company B (“the client”) for work when in reality an individual in A is an employee working for B. The advantages for this loophole were the possibility of escaping tax by payment through dividends from company A.
The IR35 legislation gives the HMRC the powers to look closely behind the trading relationship and ignore the legal individual/intermediary relationship, to determine how in their opinion you ought to be taxed.