IR35 is legislation that is contained in Chapter 8 of ITEPA 2003 that says that if a worker who is supplying a service personally is a disguised employee of the client then the worker should be suffer tax and national insurance on the same basis as other employees.
So this legislation ignores the fact that the worker may be working for their own Limited Company and focuses on the arrangements under which the worker is supplied.
The legislation interacts with other HMRC legislation also. Chapter 7 of ITEPA 2003 is the Agency Legislation which basically says that if an Agency engages a worker then they have to apply PAYE unless the worker is engaged through a Limited Company.
The IR35 legislation applies when the worker is engaged through a Limited Company, and the worker (and their associates) has a shareholding of 5% or more.
If the worker is working with an Umbrella Company then they will not own 5% of the shares so IR35 does not apply, but the Agency Legislation does still apply.
In effect what this means is that any Professional Contractor and Freelancer who runs their own company should be aware of this legislation as it does apply for each and every engagement that you take on, whether direct for a client, or though a staffing company.
The effect of a contract being caught by the legislation is that the Intermediary (your Limited Company) is required to calculate a Deemed Payment, on which PAYE and National Insurance is applied.
This is discussed in another document, and is the method by which the legislation achieves it aims which is to ensure that for any contract caught by the legislation, tax and national insurance is paid to HMRC one the same basis as if the workers was an employee.
For a contract to be caught by the legislation it needs to be shown that:
The circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.
This is an important point to be remembered.
A contract caught by IR35 is one where the engagement is one of employment.
This would be a contract "of service"
Therefore:-
A contract that is outside IR35 is one where the engagement is NOT one of employment.
This would be a contract "for service".
For the sake of clarity there is no need to prove self-employment for the contract to be outside IR35, you need to just prove that the contract is NOT one of employment.
This difference is slight, but vital!