Introduced in the UK budget in 2000, Intermediaries legislation (known as IR35 - Working through an intermediary, such as a service company). It is a guidelines directing how contractors should be treated in the UK for tax purposes, by the firms which employ them. The aim is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as service companies or partnerships.

Previously, a contractor could avoid paying NICs by using an intermediary company and getting money out in the form of dividends instead of salary. Therefore a contractor was paid without the need for employment levies such as national insurance to be deducted from pay. The new legislation purpose is to close the loophole where someone "could leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as a... consultant paying substantially reduced tax and national insurance".

IR35 ensures that if the relationship between the contractor and the client would have been one of employment had he/she been working for him directly and not through his/her company or intermediary, the contractor pays fully tax and NICs as if he/she was employed under a PAYE system..

You can find other resources to understand IR35 and calculate your salary on http://www.ir35calc.co.uk/

[source: http://www.hmrc.gov.uk/ir35]
 [07-10-2005]