ACCA Advanced Taxation (ATX) Practice Exam

What is a key aspect of 'IR35' legislation?

1. It increases tax benefits for employees

2. It closes a loophole for tax avoidance by limited companies

3. It simplifies tax filing for freelancers

4. It reduces employment taxes for small businesses

The correct answer is: It closes a loophole for tax avoidance by limited companies

The key aspect of 'IR35' legislation is that it was designed to close a loophole for tax avoidance by individuals working through limited companies, often referred to as 'intermediaries'. Under this legislation, when a worker supplies their services through a company, IR35 aims to ensure that they pay the same tax and National Insurance contributions as an employee would if they were engaged directly by the client. IR35 seeks to identify 'disguised employment' situations where individuals might be avoiding employment taxes by operating through a limited company while effectively working in a manner similar to employees. By enforcing this legislation, HM Revenue and Customs (HMRC) aims to ensure that all workers contributing similarly to the economy face equitable tax obligations, thereby mitigating the risk of tax avoidance practices that could result from the use of such structures. This is crucial for maintaining a level playing field in the labor market, ensuring that individuals who are working in comparable roles pay comparable taxes, regardless of their employment structure.