In 2000 legislation was proposed and then introduced by the government that related to any contractor or worker who was employed via a intermediary like a partnership.
The IR35 legislation was brought into existence to try to put a stop to any loop holes by workers who for instance claimed they worked through a limited company and thereby paid less tax.
HM Customs and Excise felt that certain employees were trying to disguise their being employed by working through contractor companies. HMRC felt it was loosing out on tax revenues. Those contractor’s who came under the IR35 rules were then compelled to pay more income tax and NI contributions, as it was deemed that their income would be reclassified as a salary.
To get around this legislation some contractors now work through umbrella companies based just out side the United Kingdom. They do this to try to demonstrate to the Inland revenue that their payroll and working practises show that they are actually self employed as opposed to employed.