IR35 (more accurately known as the Intermediaries Legislation) was introduced by the Inland Revenue in 2000 to tax "disguised employment" at a rate similar to employment.

To counter this tax avoidance IR35 allows HM Revenue and Customs to “look through” contractual arrangements of any current or previous contract assignments to formulate a “hypothetical contract” which they may conclude proves disguised employment. The fee paid to the worker’s Limited Company (either their own or an Umbrella Company) would then be taxed as if the Worker was paid through the PAYE scheme.

Further detail can be found on the HM Revenue & Customs web-site