Recent IR35 changes mean that the threat of being caught by this particularly unpopular tax legislation has increased. Until every public sector engager, and private sector engager to whom the reform rules apply, are proactive and ensure each working arrangement is given a fair and individual IR35 assessment, contractors will understandably remain concerned about their IR35 status.
For the majority of contractors, the consequences of working inside IR35 are well-known. Caught by IR35, and you’ll be required to pay tax and national insurance contributions on your income, just as you would when working as an employee.
With your IR35 status set to ‘inside’, you will no longer be able to pay yourself tax efficiently through a combination of salary and dividends. Understandably, this is where the legislation gets controversial. When working under the legislation, contractors are forced to pay the same taxes as employees, but without any of the safety, security or statutory benefits which employment brings.
Prior to the reform, contractors operating in the private sector could claim 5% if their company's turnover as expenses, even if they were deemed to be operating under an inside IR35 engagement, to cover the cost of running their company. Whilst once helpful, recent changes have meant that this has since been abolished.
If your contract falls inside IR35, HMRC requires contractors to calculate ‘deemed payment’. Put simply, this is the amount you have earned through your IR35 caught contract. Since the recent changes, end clients and agencies are responsible for working out a contractor’s deemed payment where reform applies, and deducting tax just as they do for employees, HMRC’s 5% expense allowance has been scrapped for contractors working in the public and private sector.
Whilst HMRC does not outline these expenses specifically, the flat rate 5% allowance was designed to cover the costs of running a business. This could include anything from premises and office costs, through to accountancy fees or stationary expenses. This deduction is made automatically without reference to any amounts met by the company, while it is only given in working out the ‘deemed profit’. It’s not taken into account in calculating the intermediary’s profits either.
Contractors working under IR35 – and in this case irrespective of whether it happens to be in the private or public sector – are able to continue claiming tax relief on pension contributions made by the PSC on the contractor’s behalf.
However, recently enforced changes to travel and subsistence (T&S) allowances mean that contractors working inside IR35 should not claim on everyday expenses such as travel, mileage, hotels and meals. HMRC are hot on this, and will reclassify this as earnings, meaning that you will be forced to pay tax and NIC on any incorrectly claimed T&S expenses.
Expenses are also allowed for which a contractor could have claimed a deduction against their earnings under the normal employment income rules, if they had at some stage been employed by the client, and had met those expenses out of those earnings. That said, employment expenses are notoriously difficult to claim, given they must meet the ‘wholly, exclusively and necessarily’ test. In other words, they must be absolutely necessary in performing the duties of employment. In many cases, contractors do not meet HMRC’s criteria for this.
Given the benefits of working under IR35 are minimal to say the least, it’s essential that as a contractor – irrespective of the sector that you work in – that you are given a fair and proper IR35 review, and one which accurately determines your employment status.
Qdos Contractor are a leading expert on the IR35 legislation, building their reputation in the contracting market with over 1,500 successfully defended cases. In addition to their consultancy services, Qdos specialise in contractor insurance policies, from Professional Indemnity to their pioneering IR35 insurance - Tax Liability Cover.
Ask away! One of our team will get back to you!