HMRC brought IR35 into effect to ensure contractors operate through their own limited company with the same benefits, responsibilities and control that any director of a limited company would, while managing a business.
If your contract or working practice states otherwise or you have the same benefits, responsibilities and control as a permanent employee, it means you fall inside IR35 legislation and are required to pay income tax and National Insurance Contributions (NICs). If you haven’t been doing this you can also end up paying penalties going back several years.
When IR35 applies, the earnings for the engagement of the intermediary is in the form of “Deemed Payment”, also known as “Deemed Employment Payment” as they are “deemed” to the income of the worker.
When you carry out a deemed salary calculation, HMRC allows an expense allowance equal to 5% of the income received to cover the administration costs of the following items:
Office cost (including home as office)
Administration and secretarial cost
Accounting and tax advice
Printing, postage and stationary cost
Costs of seeking contracts
Bank and overdraft interest
The 5% expense allowance is given at a flat rate on gross fees and is not available to employees as an expense which they can claim from the company. In addition to this, the deemed employment calculation also allows a deduction for the actual amount of certain expenses paid by your company or partnership in the year.
These are expenses which the worker could have claimed as a deduction under the normal rules if they had been directly employed by the client and the expenses had been met from their earnings. They include expenses met by the worker and reimbursed by your limited company or met by the worker for a partnership in relation to the engagement.
A deduction for the same expenses can only be given in the deemed employment payment calculation once.
One of the perks of being a contractor is having the flexibility and freedom to choose your own working hours and when to take time off. However, unlike permanent employees, contractors do not get paid when they are on annual leave and invariably, there is no one to hand the work over to.
This means when you work through your own limited company and want to go away on a holiday, you have to ensure you do not risk the work by leaving at a crucial stage of an existing contract. You have to be careful to not seek permission from the client as that would typically mean the client has ‘control’ over you and that would put a question on your IR35 status.
It is best you only ‘inform’ your reporting manager that you will be on a break – that’s it!
HMRC Consultation Document on reforming IR35 for public sector workers released on 26 May 2016 states that from April 2017, public sector clients will be held responsible for considering whether or not IR35 applies to an engagement. If the worker falls inside the legislation, the client will be required to directly deduct PAYE tax and NICs from the worker’s salary.
The clients are supposed to ensure compliance with the legislation but it also means contractors continue to bear the responsibility for assessing their IR35 status. In 2017, the government will look more broadly at the engagements in private sector.