The effects of being deemed inside IR35 from April 6th 2021
Currently, in the private sector if a contractor deems that their engagement is inside IR35, they must undertake the deemed calculation which allows a 5% deduction for general expenses from the fee billed on that engagement in a particular tax year.
It also enables the contractor to claim a tax deductions that an employee could claim, such as subscriptions and protective equipment as well as personal pension contributions.
The remainder is then taxed and must include Employers’ National Insurance contributions and then the employees’ NIC and PAYE tax deductions that an employee would suffer. The detail of how the calculation is made can be found here: https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment
If an engagement is inside (caught by) IR35, you cannot claim your travel and subsistence expenses in relation to attending the end client’s site; in the same way that an employee cannot claim their commute.
If your role requires you to travel on behalf of the role, for example travelling from the end client’s site to another site for their business, then these costs can be claimed over and above the 5% general deduction.
From April 2021, the private sector will fall into line with the public sector and the 5% general allowance is removed and all that can be claimed is what an employee could claim on their tax return. This would include subscriptions, protective clothing, pension contributions and expenses incurred in the fulfilment of your role.
These could, with agreement be reimbursed by the end client, otherwise you will have to claim those – including pension contributions – via your income tax self-assessment return.
The result is that no other expenses can be claimed and any payment from the fee payer will have tax and NICs (both employers’ and employees’) and apprenticeship levy (if applicable) deducted. Essentially, every single penny will be accounted for and you will have no profit in your company against which to offset your expenses of running your company.
These will be coming out of your own pocket; so it is small wonder that contractors in the public sector who realised that all their engagements were going to be inside IR35, determined that there was little point in continuing to trade through their company.
There were two VAT-related questions raised during the webinar.
If you do trade through your company on an inside engagement, if you are VAT registered, you will still raise a VAT invoice and this will be paid across by the end client in the usual way. It is your net fees which will be effectively ‘turned into PAYE’.
Someone made the point that employees don’t charge VAT, which is true, but you have to remember that being inside IR35 makes you an employee for tax purposes only; your company would still be raising invoices for work done even though the invoice may have tax deducted at source.
This would also be why a contractor’s company needs to maintain its liability cover; your business can still be sued because it is an independent entity of the end client, even though for tax purposes your company will appear on the fee payer’s payroll.
One attendee asked if there was a risk of being taxed twice?
The answer is no, in that you can extract the income you have been taxed on from your company without further being taxed.
On the other hand, HMRC will not allow your company to claim the PAYE deducted as a corporation tax deduction either. I suggest you speak to your accountant about how this needs to be shown in your company accounts as the IR35 element of this query I can answer, the accounting treatment should be referred to a professional for advice.
We had quite a specific question about how someone’s company would pay back a bounce-back loan, and this would apply to any of the company’s liabilities which might have to be met. If the company does not have the funds, then unfortunately the owners of the business will have to inject the necessary funds to meet the liabilities.
Another attendee asked, “what were the financial pros and cons of taking a permanent job?”
This will be different for each contractor and factors include the fees earned, the expenses incurred, including level of salary taken as part of the remuneration. It will also depend what level of salary you can earn from a permanent job.
Despite the fact that a permanent job comes with employment benefits like pension and healthcare, which a contractor has to source and fund themselves, most people may find themselves worse off from a tax perspective, particularly if the day rate that you were once earning is not increased and now includes all the relevant deductions.
Look out for part three, of this five part guide, on the IR35 Hub soon.
For IR35 consultancy services please contact Markel Tax on 0345 223 2727.