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HMRC internal manual

Employment Status Manual

Introduction: the position before 6 April 2000

Before 6 April 2000, an individual worker who would otherwise have been an employee could disguise their employment status by providing their services to a client through an intermediary. Typically the intermediary used in such circumstances was a company (commonly referred to as a service company or a personal service company).

In these circumstances, there was no contract between the worker and the client. The contract to supply the worker’s services was between the client and the intermediary, either directly or via another party, such as an employment agency. This arrangement avoided the employment income and National Insurance legislation that would normally have applied if the worker had been engaged directly as an employee of the client.

The intermediary was paid gross and then had complete flexibility over how to dispose of what was essentially the worker’s wages. As the intermediary was usually under the control of the worker they could choose how to distribute its funds.

When the intermediary was a company the worker was often paid a small salary that just exceeded the National Insurance contributions threshold, ensuring that the year counted towards such rights as Statutory Sick Pay, Statutory Maternity Pay, and state pension. The balance of the intermediary’s income was paid out in expenses and dividends, avoiding or substantially reducing any tax and National Insurance liabilities that would have arisen if the worker had been employed directly by the client.

Companies with more than one worker, commonly known as composite service companies, were also used in this way. Rather than there being one worker, the company had many workers, each owning a different class of share in the company. The composite company provided the workers’ services to different clients under separate contracts. Dividends were then paid to the workers on the different shares by reference to the amount earned from their contract. There was also the same scope for paying expenses and a small wage, as with a personal service company.

A similar outcome could be achieved when the intermediary was a partnership. In these circumstances the worker did not receive a wage but took their income as drawings from the business. However, the use of partnerships was less common than the use of companies.


The contractual and payment arrangements described above were not subject to the provisions of the Agency legislation (ESM2001). By providing their services through an intermediary the worker could avoid or reduce their own tax and National Insurance liabilities. In addition, there was the opportunity for other parties in the contractual chain to avoid or reduce their National Insurance liabilities. Therefore the IR35 legislation was introduced to counter this form of avoidance and applies to income received for services performed on or after 6 April 2000 (ESM3012).