When discussing a contractor’s employment status in terms of the IR35 legislation, more often than not, emphasis is put onto being outside of the legislation. Given that working outside of IR35 is more desirable due to the potential differences in take home pay, it is no wonder that this is where the focus lies.
After having their contract and working practices reviewed, many contractors will fret should their result put them inside the legislation with no reasonable options to amend it. There is no reason to be concerned should this happen to you, the truth being that yes, you will likely have to pay more tax and NICs than you would have otherwise for that particular engagement but no, you are not in trouble. It is not illegal to be operating within the legislation, all the Revenue ask is that you pay the relevant tax and national insurance for each engagement.
If IR35 applies to your contract, you will need to make a ‘deemed salary payment’. This can be completed at the end of the tax year, when you will calculate any missing tax/NICs due. It is a common misconception that you must make all IR35 deemed payments as salary but you can still pay yourself via dividends as normal or retain the cash in the business, you will simply need to make a deemed salary calculation at the end of the tax year. It is therefore important to ensure you budget accordingly for this extra payment that will be made at the end of the year.
Deemed salary payments are made according to the normal PAYE and NIC payment rules and should be made by the 19th April, included in the PAYE return and Employer’s Annual Return. If you cannot calculate your payment prior to this date for whatever reason, you can make a lower provisional payment, ensuring that this is made clear on the Employer’s Annual Return. The payment must then be completed fully by the following 31st January, however interest will be applied to any payments made after 19th April and penalties will be applied if the provisional payment was not made clear as such. Failure to complete all payments by 31st January the following year will result in necessary actions being taken by HMRC to recover the payment plus any interest and penalties due.
Your accountant will be able to assist you with any deemed salary calculations and how to make these payments.
Just because one contract is considered inside the legislation, doesn’t mean that all of them will be. Each engagement should be assessed separately and it is also possible for the situation to change within a single engagement. If all of your contracts are seeming to be found inside the legislation, then an assessment of your trading style may be worth some consideration. Many will find that the reduced financial benefits of running a limited company would devalue the worth of trading in such a way, making it a lot of effort for little gain. Other options to consider may be operating as a sole trader or under an umbrella company but everybody is different and using a limited company may still be the best option for you.