What is the IR35 5% expense rule

What is the IR35 5% expense rule?

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IR35 legislation came into effect in April 2000 to identify individuals who are working as disguised permanent employees to avoid paying taxes.  If a contractor has the same benefits, responsibilities and control as a permanent employee they are more likely to be caught inside IR35.

Contractors who provide services through their own limited company and have contracts which are caught under IR35, will have to carry out a deemed salary calculation. HMRC allows an expense allowance of 5% while calculating the deemed salary.

What is the IR35 5% allowance?

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 incurred in the running of a limited company.

The following administration costs are covered in the 5% expenses in IR35:

  • Office cost (including home as office)
  • Administration and secretarial cost
  • Accounting and tax advice
  • Printing, postage and stationary cost
  • Employers and Public Liability Insurance
  • Training courses
  • Costs of seeking contracts
  • Computer equipment
  • Bank and overdraft interest
  • Hire purchase payments

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.

If your contract is caught partially under IR35, then the deemed payment calculation applies only to the portion of your company’s annual turnover which relates to engagements caught under IR35.

Other expenses

In addition to the IR35 5% allowance, 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. 

Here are some of the expenses for which deductions are given:

  • Pension payments
  • Employment expenses such as professional fees and subscriptions
  • Travel expenses (you can claim tax rebate on any expenses which would have been reimbursed had you been an employee of the client)

Our experts will be able to give you further guidance on what other expenses can be claimed.

Know more about deemed payment and how to calculate it.

If you are a contractor in need of IR35 advice, call the Bradleys’ Contractor today on 0203 507 0087 or alternatively, please email your query to contact@bradleyscontractors.co.uk

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