You’ve probably heard of IR35 by now. But it’s just as likely that some of the details still seem a bit murky.
We’ve put together this article (and a full, in-depth downloadable guide) to guide you through the complicated tax legislation that is IR35. In it, we’ll focus on what it means to work ‘inside IR35’, and what you can do about it.
What does inside IR35 mean?
In simple terms, working inside IR35 means that the service you provide is deemed by HMRC to reflect a service of employment, not self-employment.
That means you’re likely to be taxed more, given that contractors operating inside the rules are considered employees for tax purposes.
But who is responsible for deciding if a contract is inside or outside of IR35? Well, this depends on what sector you work in. Since 2017, for assignments with public sector organisations, the responsibility for assessing IR35 status sits with the public sector organisation as the end user of your services. For private sector engagements, the responsibility remains with the contractor until 6th April 2021 when the reforms to off-payroll working (IR35 reforms) take effect. Post 6th April 2021 the responsibility for assessing the IR35 status of an assignment will sit with the end hirer in both the public sector and private sector.
That said, if your end client falls under the taxman’s definition of ‘small’ , it will be your responsibility to set your own tax status from next April.
The impact of an inside IR35 assessment depends on whether you are working in the public or private sector.
Public Sector – The responsibility for determining IR35 status sits with the end hirer
Here are the details of what will be expected of you when working inside IR35 :
- The fee payer will deduct PAYE tax and National Insurance from your invoice value (excluding VAT)
If the assignment is found inside IR35, the fee payer – the entity that makes payment to your limited company – will be required to deduct PAYE tax and NI contributions before making payment of the net pay into your limited company. You will need to provide the remittance advice showing these deductions to your accountant so they can account for this correctly.
Private Sector – The responsibility for determining IR35 status sits with the contractor (until April 2021):
- You will pay employment taxes
95% of the income from an inside IR35 engagement must be treated as employment income. You (or your accountant) will need to calculate a deemed salary and make the required payroll submissions to HMRC. - You’ll be able to claim limited expenses
As a contractor working inside IR35, you cannot claim the same expenses that you can when working outside the rules. In 2017, the taxman introduced changes which mean that travel and subsistence expenses, like mileage, accommodation, meals and other ad-hoc costs, are not legitimate on inside IR35 contracts. - The 5% allowance is set to be scrapped for IR35
Where the contractor retains the responsibility for administering the IR35 rules, the government allows a 5% expenses allowance. This is not available where the responsibility has shifted to the end hirer From April 2021, when working for a medium or large end hirer the rules will be brought in line with the private sector.
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Working as a limited company inside IR35
Although the legislation can sound scary, it doesn’t necessarily mean you shouldn’t work through a limited company inside IR35, as there are still many benefits.
Obviously, there are more tax benefits if you are working outside IR35 (which is fair enough considering the increased burden), but just because a specific contract is inside it doesn’t mean you should immediately turn to other solutions.
There are still quite a few benefits to operating inside IR35 and working through a limited company rather than using an umbrella company (more information on umbrella companies later). Here are a few:
- Take home pay should be slightly higher via a limited company due to extra income gained from the Flat Rate VAT Scheme (click the link for a detailed breakdown of the FRS) which can often add thousands to your annual income - on a £100,000 contract it would add £1,400 extra income. You will not benefit from the flat rate scheme if you use an umbrella company.
- In the private sector, until April 2021, you only pay tax on 95% of your income rather than 100% via an umbrella company. HMRC provides for a 5% allowance which is intended to help with the running costs of your company. This allowance will still be available where you retain the responsibility for administering the rules. E.g. you are working for a small end client.
- Just because this contract is inside IR35, it doesn’t necessarily mean other contracts that run concurrently and after, won’t be outside and you will have everything in place.
Expenses when inside IR35 - assignments in the private sector only
If you are working in the private sector, when calculating the ‘deemed salary’, certain expenses can be deducted from your contract income. To be clear, the following expenses have been mentioned by HMRC in various consultations and FAQ publications:
- Employer contributions to approved pension schemes which attract tax relief in the normal way.
- The gross salary paid, plus any employer National Insurance contributions on both the salary paid and any deemed payments.
- 5% of the gross income from relevant engagements to cover running costs.
- Any other expenses which do not fall within S336 ITEPA, but have another statutory route for a deduction, such as professional subscriptions and professional indemnity or personal liability insurance.
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What about using an umbrella company for IR35?
Earlier, we discussed the merits of choosing to stay as a limited company if inside IR35. But, if you don't feel it's right for you, then an umbrella company might be the way to go—but what though does that actually mean?
With the right umbrella company, it can be a stress- and hassle-free way of getting paid whilst you contract. A compliant umbrella company will become your employer. They will ensure that you are paid a salary in line with the terms of that contract with your agency or end hirer, and make the necessary deductions and payment of PAYE and NIC.
Employees of an umbrella company will get all the benefits and protections of employment, such as a workplace pension, holiday pay and maternity/paternity pay, amongst other employee benefits, whilst still retaining all the freedom of contracting.
As a contractor, you may find that assignments vary in their IR35 status meaning that you may decide to work flexibly between your limited company and umbrella employment. SJD Accountancy can help you to stay agile via our margin free umbrella employment service which is available on the majority of our packages.
Got a contract that you think might fall inside IR35? Take a look at our IR35 Contract Review Service.
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