The special "IR35" rules apply in particular to an individual or individuals who set themselves up as a limited company (an "intermediary") and supply themselves to work for clients under a contract between the client and the intermediary. The individuals are, therefore, directors of their companies, not self-employed. The object this legal arrangement is to reduce the amount of income tax and Class 1 National Insurance contributions (NICs) paid by the individual.

Where these circumstances apply, the complex IR35 rules require you, the director, at the end of each tax year, to consider the terms of the contract with each client and decide whether, if the contract had instead been between the client and you personally, the client would have had to have treated you as an employee and put you on the payroll. If so, you are required to treat the payments from the contract, after certain deductions, as earnings that are subject in full to tax and Class 1 NICs. Against these liabilities, you can offset the tax and NICs that you have already paid during the year.

As you are a director, an "office holder", of your company, you are not also an employee unless you issue yourself with a contract of employment, spelling out the terms of your employment. If you have such a contract of employment, you are both an "employee" and a "worker" and entitled in full to all employment rights.

Also, as a director, you are required to deduct tax and employee Class 1 NICs from all earnings that you pay yourself, and your company must also pay employer Class 1 NICs on those earnings. However, if most of the money you take from the business is in the form of dividends, these are subject only to income tax, not to NICs.

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