Tag Archive | "outside IR35"

IR35 – 12 years on and still nobody knows if they’re in or out


In the aftermath of the Lester affair, I have managed to get involved in a bit of a debate has sprung up about what actually is a freelancer. This might seem a fairly trivial and straightforward question, but as you dig deeper into the reasons why IR35 was brought in, it all gets just a little complicated.

As the 12th birthday of IR35 rapidly approaches, it’s worth reflecting on why it was introduced. After all there is a whole generation of freelancers out there who have never known life without its Damoclean presence. And who may not know its gestation

Originally it was promoted as a way to recover taxes from people who left their permanent positions, had a nice weekend off, and then returned as a fully-fledged contract worker doing exactly the same role for exactly the same people. Nothing to do with freelance work, everything to do with them getting more take home by taking advantage of corporate taxation rates and their erstwhile employer not having to worry about little things like Employers NICs and holiday pay any more.

And you have to accept that is actually not a totally stupid idea. Certainly HMG accepted it as a rationale and after a couple of false starts, brought in the IR35 we know and love.

Snag is this was the Tony Blair government we’re talking about here. It may just be coincidence but IR35 was drafted so poorly that nobody knew who was actually in its scope; the Friday-to-Monday brigade clearly was, but so was every other one man band out there. And that’s when the fur started to fly and the PCG came into being.

It’s also worth noting the shift in emphasis by HMG themselves. They were clear that “genuine businesses have nothing to fear from IR35”, which they probably wouldn’t have if anyone could define a genuine business. In 2002, in the House, the then Postmaster General expanded on her concept of IR35: apparently it was now meant to apply to people who used a Limited Company to avoid paying the correct taxes. Which is fine apart from there still being no way to distinguish my company from Richard Branson’s without taking it to court. But the point is that the original intent seems somehow to have gone walkies and IR35 is now being presented as a general taxation measure to which all sorts of people are liable.

Scroll forward ten years and we have Osborne saying that he has to keep IR35 to protect a taxation revenue stream, from which we can assume that he was still sold on the original idea of IR35 as a preventative measure and not as a tax gathering one. Shame nobody told HMRC that, really…

So after all this time we are still in this idiot position of trying to prove we are genuinely in business should HMRC suddenly present us with a £90,000 tax bill. And as we have seen, that is a path fraught with peril and pitfalls. To my simple mind the fact I don’t have a constant income stream, I have to pay for all sorts of things that employees don’t, I am always at risk of not being paid at all and I have multiple clients a year would seem to say I am a business, but sadly that doesn’t count for much in the eyes of the law. After all, where’s my factory, my employees and my pile of manufactured widgets? Which is about as far as HMRC’s understanding of a business stretches

For IR35 to be applied as per its original intention – if we allow that the original intention is the only one that counts – is actually really obvious. If your client now is the same as your previous employer, it’s up to you to prove that IR35 doesn’t apply by using existing case law. If you’ve never worked for your client before, IR35 can’t possibly apply. How hard is that?

Clearly, very hard. 12 years on and still nobody knows if they’re in or out.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2012 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: I don’t know by cowbite

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At a VERY long stretch, this IR35 judgement may be supportable


You will probably have heard me sounding off at fairly regular intervals about how inconsistent and impossible to judge the average IR35 case is. I’ve looked at many appeal judgements over the years and each one has been supportable, given the vague nature of that which is being judged. You can usually kind of see where the judge was coming from.

Now, however, we have a case that fails even a generous stab at understanding the logic.

How else do you describe a judgement that puts the contractor outside IR35 and then inside IR35, within the same contract…?

The case was JLJ Services Ltd vs. HMRC, heard by Howard Nowlan. On the face of it this was one of those cases where a contractor, a Mr Spencer, working through his own limited company and an agency for an end client had been challenged under IR35 and found wanting. He appealed the case and it went to the First Tier tribunal.

So far, so good. Well, not good for Mr Spencer, but you know what I mean.

Then life starts to get a little strange. JLJ had started off as a Unix-based technical expert for the client, Allianz in Bristol, working on a succession of projects. After a few years of presumably valuable and acceptable work, Allianz’s requirements changed and Mr Spencer moved to a more part-time role, on a series of rolling contracts, picking up whatever needed doing.

Now this is the key point, as far as the judge was concerned; the first part, being deliverables based, did not exhibit a degree of control, the second, however, did. Accordingly Mr Nowlan rules that the first part was outside and the second part inside. This despite everything working to the same overarching contract – only the schedule of deliverables had changed – and I’m guessing it never crossed Mr Spencer’s mind that the game had changed underneath him. He simply kept on doing what he was clearly very good at for a client with whom he had a good and mutually beneficial relationship.

That said, by screwing up your eyes and squinting, you could just about see where Nowlan was coming from; the increased level of Control moved the IR35 goalposts in the wrong direction.

Ah but, I hear you cry, having been paying attention over the years, Control is not the only test. What about Substitution, Mutuality and that most recent phenomenon, “being in business”? Which is where I rather part company with the judiciary.

Substitution? The contract had a right of substitution and, as near as I can tell from the judgement, Allianz could reject a substitute with reasonable grounds but were not actually averse to considering taking one on if Mr Spencer was unable to work. Nowlan, however, after a bit of verbal gymnastics – including allowing an Allianz representative rather too much latitude in the accuracy of his evidence giving – said that he “ took it to exhibit a realistic businessman’s contempt for a clause that he probably found irrelevant”, a position he agreed with.

So, Mr Nowlan, how many employees do you know who are allowed to submit a substitute worker?

Mutuality? A mere bagatelle. Mr Nowlan’s words: “There is considerable case law in relation to this test, progressively indicating that the test is of diminished importance or that it is indeed nearly meaningless”. Really? Can’t say I’d noticed any diminution in its importance. Cases have recently hinged on someone being sent home without pay when the systems failed and they could no longer work, while the permies sat and waited for normal service to be resumed. On full pay. Heigh ho.

So there went the RMC judgement on what constitutes employment then.

In business? It’s clear from various comments that Nowlan considered JLJ Services to be irrelevant and queried why it had been set up. So a judge trying a contactor case involving an agency who hasn’t heard of S44-47 ITEPA 2003 then. But hey, it was Nowlan’s first IR35 case.

So in conclusion, at a very long stretch, the judgement may be supportable. But we should not lightly dismiss the ability of a judge to take a fairly cavalier attitude to the key IR35 tests on some fairly flimsy grounds.

In fact the only good thing to come out of the whole case is that we should be grateful that First Tier cases do not set precedents. Luckily for us…

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: 1996 UK Royal Mail Cartoon Stamp Card by andertoons

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Hey, look at what we just did. We killed off IR35!


I thought it worth returning to the Agency Workers Regulations again, if only because I was ever so slightly amused by the reactions of certain agencies to them. With their industry’s usual instant and carefully controlled grasp of the subject, this week contractors started getting emails and letters from some agencies about how to manage the AWR. After the act had taken effect and therefore after the point at which you should react to it for an existing engagement. Genius, isn’t it?

Anyway, as is the way of such things, the letters are asking unanswerable questions.

The first one is “Do you work through a Limited Company or an Umbrella?”. Excuse me, but why do you have to ask? You have the contract in your filing system, along with the payment terms and the pointless fourteen pieces of ID. Don’t you know who you are dealing with? Please don’t tell me you weren’t even faintly interested in the company with whom you signed the contract. Silly old me thought you were dealing with MyCo when clearly you are only interested in dealing with me personally. OK, so that explains a lot, doesn’t it? Dropped the mask ever so slightly there, Mr Agent.

Secondly, “Do you consider yourself to be in business?”. Cue raucous laughter. I have signed a contract with you in my capacity as the Director of a UK Limited Company. A contract in which there are several clauses establishing that there is no employee-like relationship intended, which directs you to pay money into a business bank account and which charges you VAT. Does that not give you a slight hint that I’m trying very hard to be a business and not a temp from Office Angels?

Finally, “Do you consider you are operating inside or outside of IR35?”. Now you really are taking the Michael. We’re using your contract. You set up the deal with the end client, you know the requirement, you know what’s in your contract with them, and you understand how the client views the relationship between me and them. So why ask me? If I am inside IR35, it’s because you put me there, not the other way round.

Ok, so the poor dears are only trying to keep their masters happy and, as usual, de-risk everything as far as they can. Since you can’t actually opt out of the AWR anyway it’s all rather pointless, but if it makes them happy. Although there may be a different slant on this.

If the agencies, on behalf of their clients – who, we must remember, are actually those stout and highly aware souls in the Human Remains department – are concerned about the people they supply being in the scope of the AWR and so able to claim all these interesting extra benefits like holidays, there is a very simple way to prevent it. If you’re in business, you’re out of scope. It says so in the AWR itself.

So, Mr Agent, let’s make sure I am genuinely in business, as best we can, so the AWR can be ignored. This means that firstly you stop the pretence that you have this vast pool of experts at your disposal and you just send a couple of the most relevant over for the client to look at. Secondly that the client will exercise no direction and control over how the work is to be performed, beyond that minimum necessary that all workers will need to follow. And finally we drop all this pseudo-employee-with-multiple-exclusions contractual nonsense and start using simple business-to-business contracts. You know, something along the lines of “YourCo will supply these skills for this period to deliver this thing for which we will pay you this amount of money, conveniently broken down into weekly payments. The End”. It really could be that simple.

Hey, look at what we just did. We killed off IR35 as well. Gosh…

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Consensus Kills by miss_rogue

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2010 – a year of change and opportunity for contractors?


Contractors may have breathed a sigh of relief following the pre-budget report having found little changed. However can any tax payer really expect to pay the same tax/NIC post general election?

Considering the state of the UK’s finances the answer has to be a resounding no. The electioneering has begun and we hear calls from one party for a £10K nil rate tax band, accusations from the current incumbents of a forthcoming class war but the emphasis from all three main parties is clearly on fairness.

IR35

Public campaigns for the repeal of IR35 have so far failed. If they had succeeded it would be unrealistic in the extreme to expect in its place a system where less or even the same tax/NIC is generated from those operating through limited companies.

The Agency Workers Directive (AWD) calls for a definition of the genuinely self-employed and suggests that those outside IR35 would also be outside the AWD. This new legislation presents a real opprtunity for end clients and agencies to understand and address the issues of employment status. We could at last see an end to engagers who want all of the controls over the freelancer as an “employer” but with none of the responsibilities that an employment relationship brings. The AWD in its current form also addresses the perceived unfairness with regard to employment rights for those inside IR35.

Umbrella Companies

Arguably expenses for Umbrella users were saved thanks to the Daily Telegraph! The future is the flexible workforce and there is still an important role for umbrella companies to play. HMRC has fired several warning shots regarding Umbrellas use of over- arching contracts of employment and it seems there are numerous ones out there that do not work. Returning to the issue of fairness and the fact that agency workers generally cannot claim expenses the Umbrella user may find him/herself in the same position as the PAYE agency worker.

Changes

Brace yourselves for a change of government, an emergency budget and more tax to pay.

Opportunities

New regulations bring opportunities for education and better understanding of employment status issues by all the parties in the contractual chain which is good news for Contractors.

In the meantime we still have IR35 and Umbrella expenses schemes and HMRC is very much out there using its new powers and spending its enormous budget on compliance work. 2010 is going to be a year for all contractors to take notice of the changes and the opportunities and consider their positions accordingly.

Kate Cotterell is Managing Director of Bauer & Cotterell.
© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: dice by QwirkSilver

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Worried about IR35 – but will an umbrella company shelter you from the tax man?!


At one point it seemed as though HMRC’s radar was focused solely on the Construction Industry, but now their gaze has fallen hard and fast on limited company contractors (yet again).  In the last month Accountax have seen a 162 % increase in the number of IR35 enquiries instigated by HMRC.
These enquiries, spurred as usual, off the back of Compliance visits and HMRC’s new powers of inspection see HMRC firing on all cylinders, and doubling their resources for compliance.
It is now more important than ever to ensure your company is fully compliant and know what the law says.  Fundamentally though you must get it into your head that as soon as HMRC write to you or your accountant requesting a Compliance visit they will look at IR35.  Do NOT be lulled into a false sense of security that IR35 is not in their mind.  It is.
Secondly you must not be swayed from your arguments.  Comes down to three fundamental criteria:
Personal Service:  Are you obliged to do the work yourself?  If not, then IR35 cannot apply.  Do you have a right to send a substitute?  Is the substitute only vetted to check skills, qualifications or experience?  If this is the case you are not obliged to provide personal service and as such IR35 does not apply – you do not have to SEND a substitute, the right to send one is sufficient.
Control:  Are you told how to do the work?  If not, then IR35 cannot apply.  If the manner in which you provide the services is your own (ie you determine how you will design, approach, develop and actually carry them out) this is sufficient.
Mutuality of Obligations:  Are you obliged to do the work, and is there an obligation to provide you with work.  If no such obligation exists IR35 cannot apply.
HMRC must establish all 3 criteria exist before IR35 can apply.
In Business factors: the final consideration is the “in business” test.  Do you invoice?  Do you have insurances? Do you have company equipment and materials?  Are you identified separately as a contractor?  These factors will all help to demonstrate you are in business on your own account, but they do not determine IR35 on their own.
Obviously these factors, on the face of it, are fairly straightforward.  The problem arises due to badly drafted contracts which do not contain clearly how the contractor provides the services.  Most limited company contractors I have dealt with would not tolerate, nor adhere to, being treated like an employee by the end client.  The problem is the contract does not reflect this.
Agencies are slowly realising the dangers of IR35 (which has taken long enough), and now is the time for contractors to strike and ensure they get their contracts reviewed properly and negotiate with the agencies to implement the terms they want!  It can be done – persistence is not futile!
What contractors must not do is jump ship to umbrella companies merely because they are scared of IR35 – you may simply be jumping out of the frying pan into the fire!  Umbrellas received a mention in the Pre Budget Report, yet again, warning of a consultation process.  While I do not practically see how HMRC could possibly legislate against Umbrella companies, HMRC have increased their efforts in targeting umbrella companies and Accountax are now dealing with double the amount of Umbrella company investigations.
Not all umbrella companies will fall foul of HMRC, and not all should be avoided, however there are still a great many who exploit the expenses legislation and play on a contractors fears of IR35.  Umbrella companies work well for a number of individuals but they do not work for everyone!
Things contractors should beware of:
“fully IR35 compliant”.  IR35 does not, and can not, apply to umbrella companies.
“approval”.  Third party “approval” or “accreditation” does not mean the umbrella is compliant, it simply means someone has checked them for MSC implications, and not for basic compliance.  This is of little benefit to a contractor.  Accountax have seen a number of umbrella with third party approval for MSC implications fall foul of HMRC because they have not operated expenses, employers’ obligations etc properly.  If an Umbrella company has not paid your tax across, or processed your expenses correctly HMRC can pursue you for the liability.
“option”, “solution”, “scheme”.  Be wary of companies offering a variety of options or solutions and various tack on services such as recommending accountants etc.  Any company stating on a website they offer “solutions” are sure to be high up on HMRC radar and attract unwanted attention.  If they are offering a “one stop shop” it is likely they will be considered a scheme by HMRC and caught by the MSC legislation.
“dispensation”.  Any company promoting the fact they have a dispensation as part of their marketing strategy should be viewed with caution.  A dispensation does nothing more than “dispense” with the umbrella company’s need to produce a P11D.  It does not allow you to claim expenses you have not actually incurred, if a company is telling you this you could find yourself personally liable.
These are just a few things to be wary of, unfortunately for contractors for every one umbrella which operates correctly there are a dozen who do not.  Umbrellas can work well for contractors, but likely if a limited company is suitable for you an umbrella would not be. Your best bet is to get your IR35 position checked thoroughly by a professional adviser who can back up their claims (do they represent at tribunal level for example).  One golden rule – DO NOT JUMP FROM YOUR LIMITED COMPANY WITHOUT ADVICE.

At one point it seemed as though HMRC’s radar was focused solely on the Construction Industry, but now their gaze has fallen hard and fast on limited company contractors (yet again).  In the last month Accountax have seen a 162 % increase in the number of IR35 enquiries instigated by HMRC.

These enquiries, spurred as usual, off the back of Compliance visits and HMRC’s new powers of inspection see HMRC firing on all cylinders, and doubling their resources for compliance.

It is now more important than ever to ensure your company is fully compliant and know what the law says.  Fundamentally though you must get it into your head that as soon as HMRC write to you or your accountant requesting a Compliance visit they will look at IR35.  Do NOT be lulled into a false sense of security that IR35 is not in their mind.  It is.

Secondly you must not be swayed from your arguments.  It comes down to three fundamental criteria:

Personal Service

Are you obliged to do the work yourself?  If not, then IR35 cannot apply.  Do you have a right to send a substitute?  Is the substitute only vetted to check skills, qualifications or experience?  If this is the case you are not obliged to provide personal service and as such IR35 does not apply – you do not have to SEND a substitute, the right to send one is sufficient.

Control

Are you told how to do the work?  If not, then IR35 cannot apply.  If the manner in which you provide the services is your own (ie you determine how you will design, approach, develop and actually carry them out) this is sufficient.

Mutuality of Obligations

Are you obliged to do the work, and is there an obligation to provide you with work.  If no such obligation exists IR35 cannot apply.

HMRC must establish that all 3 criteria exist before IR35 can apply.

In Business factors

the final consideration is the “in business” test.  Do you invoice?  Do you have insurances? Do you have company equipment and materials?  Are you identified separately as a contractor?  These factors will all help to demonstrate you are in business on your own account, but they do not determine IR35 on their own.

Obviously these factors, on the face of it, are fairly straightforward.  The problem arises due to badly drafted contracts which do not contain clearly how the contractor provides the services.  Most limited company contractors I have dealt with would not tolerate, nor adhere to, being treated like an employee by the end client.  The problem is the contract does not reflect this.

Agencies are slowly realising the dangers of IR35 (which has taken long enough), and now is the time for contractors to strike and ensure they get their contracts reviewed properly and negotiate with the agencies to implement the terms they want!  It can be done – persistence is not futile!

What contractors must not do is jump ship to umbrella companies merely because they are scared of IR35 – you may simply be jumping out of the frying pan into the fire!  Umbrellas received a mention in the Pre Budget Report, yet again, warning of a consultation process.  While I do not practically see how HMRC could possibly legislate against umbrella companies, HMRC have increased their efforts in targeting umbrella companies and Accountax are now dealing with double the amount of umbrella company investigations.

Not all umbrella companies will fall foul of HMRC, and not all should be avoided, however there are still a great many who exploit the expenses legislation and play on a contractors fears of IR35.  Umbrella companies work well for a number of individuals but they do not work for everyone!

Things contractors should beware of:

“fully IR35 compliant”. IR35 does not, and can not, apply to umbrella companies.

“approval”.  Third party “approval” or “accreditation” does not mean the umbrella is compliant, it simply means someone has checked them for MSC implications, and not for basic compliance.  This is of little benefit to a contractor.  Accountax have seen a number of umbrellas with third party approval for MSC implications fall foul of HMRC because they have not operated expenses, employers’ obligations etc properly.  If an umbrella company has not paid your tax across, or processed your expenses correctly HMRC can pursue you for the liability.

“option”, “solution”, “scheme”.  Be wary of companies offering a variety of options or solutions and various tack on services such as recommending accountants etc.  Any company stating on a website they offer “solutions” are sure to be high up on HMRC’s radar and attract unwanted attention.  If they are offering a “one stop shop” it is likely they will be considered a scheme by HMRC and caught by the MSC legislation.

“dispensation”.  Any company promoting the fact they have a dispensation as part of their marketing strategy should be viewed with caution.  A dispensation does nothing more than “dispense” with the umbrella company’s need to produce a P11D.  It does not allow you to claim expenses you have not actually incurred, if a company is telling you this you could find yourself personally liable.

These are just a few things to be wary of, unfortunately for contractors for every one umbrella which operates correctly there are a dozen who do not.  Umbrellas can work well for contractors, but likely if a limited company is suitable for you an umbrella would not be. Your best bet is to get your IR35 position checked thoroughly by a professional adviser who can back up their claims (do they represent at tribunal level for example).  One golden rule – DO NOT JUMP FROM YOUR LIMITED COMPANY WITHOUT ADVICE.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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As a contractor, what impact will IR35 have on my take home pay?


Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

While it is fair to say that IR35 will have an impact on your own net income, quantifying exactly how much impact is not that simple, since there are several variables. You can, however, compare the overall results in general terms.

There are basically four ways to get paid as a freelance contractor: under normal PAYE, either on a fixed term contract or as an agency employee, through an Umbrella company, with your own company operating inside IR35 or with your own company operating outside IR35.

Normal PAYE

Whether you are on a Fixed Term Contract – essentially a normal employment contract but with a pre-agreed termination date – or are employed by the agency who found the work, you will be treated as a normal employee for tax purposes and pay all the usual taxes and NICs. Expenses are very much at the discretion of the employer or agency, but will be limited.

IR35 cannot apply and hence has zero impact.

Umbrella Company Contractor

You are in effect an employee of the umbrella and so IR35 cannot apply. Once again, you pay full PAYE and NICS on your income. However, out of your gross you also have to pay Employers NICs (usually the contract rate will have been raised to cover this cost) and the umbrella’s service fees. You can, however claim various working expenses that will reduce your overall tax burden; in effect the costs you incur by working become tax-free income. Beware, though, that all such expenses have to be justified and verifiable and treat claims by umbrellas that they have generous expense policies to increase your take-home with a degree of caution. The umbrella will also make other deductions to cover various statutory requirements such as holiday pay and pensions

The end result is you will take home more net income than straight PAYE, precisely how much depends on your level of working expenses.

Own Company inside IR35

At its simplest, and starting with your gross income from the contract, you can deduct 5% to cover operating costs of having your own company, allowable business expenses such as travel and equipment costs, Employers NICs paid during the year and any salary paid during the year. The balance remaining is the “Deemed” income and is liable to full PAYE and NICs.

In terms of overall impact, you are paying tax on 95% of your gross rather than the 100% if you are working through an umbrella, so there is a small benefit to this approach.

Own Company outside IR35

You can set a salary level of your choosing and then take any post-tax profits in the form of dividends, which are not liable to NICs. Setting a gross salary to the same as the tax free personal allowance therefore means you can save significant amounts of taxation. You offset salary payments, working expenses and other costs such as training (which is not allowable under IR35) and pension payments against your gross, pay Corporation Tax on the net profit, the balance being the amount available to you as dividends. You can also leave some or all of those profits in the company for later years.

The overall impact is that you will retain a higher percentage of your gross income than through any other route. However, it does mean that you have to be certain of your IR35 status.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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