inside or outside IR35 through an Umbrella Company?

The IR35 legislation was designed to counter tax avoidance (not evasion) in the area of service provision (i.e. contractors working through small private limited companies).  The legislation affects anyone who is working via an intermediary, such as a limited company, Umbrella Company, or a partnership. Up until this legislation was introduced, many contractors working within the services industry found it more tax efficient to receive income as dividends, whilst only receiving a small salary, therefore avoiding paying large amounts of tax and NICs.

Freelance contractors were identified as "tax avoiders", as they were performing roles similar in nature to those of permanent employees.  To this end the HMRC introduced the concept of "deemed salary" which will be taxed and subject to NICs as if it has been paid as a salary.

IR35 only applies if the individual is working for a client under circumstances where if it were not for the imposition of the Limited company or, Partnership (known as the "intermediary"), it would be one of employment; the HMRC argues that in these cases the individual is deemed a "disguised employee". Anyone working via an intermediary will be caught by the new rules if they fail the 'IR35 test '.

This test determines whether the person would be an employee if they were contracting directly with the 'client', rather than using this intermediary. If their terms and conditions or working practices are of employment then they will be caught by IR35 legislation.