If you’re caught within IR35, HMRC considers you an employee when it comes to taxation, so you’ll have to pay income tax and National Insurance contributions like an employee. However, as long as IR35 exists, it will remain an important topic of discussion – and dissension.
For this reason, we’re focusing on this legislation once more, especially what contractors should do if they’re working inside it. Can you avoid paying back taxes? Can you still operate as a limited company?
While the new IR35 reform has been postponed until 2021, it’s still important to look into these and other questions so that you can gain a deeper understanding of your rights and responsibilities when it comes to the intermediaries’ legislation.
Am I Inside IR35?
First of all, you need to figure out whether your contract falls within this legislation or whether you’re considered self-employed by HMRC. HMRC’s CEST (Check Employment Status for Tax) tool can help you to find this out – it’s well-known this tool isn’t perfect, so don’t hesitate to contact Gorilla Accounting if you want to make sure.
We provide expert IR35 advice for contractors and are capable of answering any questions you have about your current contract.
Should I Change My Operating Structure?
Even though the IR35 reform has been delayed until the next tax year, fear of the upcoming changes has made many contractors move into a PAYE structure, go back to being sole traders or start operating through an umbrella company – all to avoid being caught within IR35.
However, you don’t have to give up your limited company if a contract is inside IR35. You will, however, have to pay the necessary taxes. This means that you can take on different types of contracts without having to restrict your business; in order to do this, you will need to be organised and to make sure that all of your documentation is correct. Seek professional help if you’re unsure.
There are many benefits to owning a Personal Service Company or a limited company, so you may not want to dissolve it in order to avoid IR35. In addition, contractors tend to work on several projects at once so, if only one or two are considered to be inside IR35, you shouldn’t have to change your business model to accommodate that.
In essence, if you pay the right amount of tax, which includes national insurance deductions and income tax, you won’t have any problems.
Can I Avoid a Huge Tax Bill?
We’ve spoken at length about how HMRC doesn’t always get it right – so, if a contract you performed is now under scrutiny or if your work is considered to be inside IR35, you may still be able to avoid paying hundreds or thousands in back taxes and National Insurance contributions if you appeal the decision.
HMRC has lost several IR35 cases from people who have done just that, including public figures. TV presenter Lorraine Kelly, for example, fought back against a tax bill of £1.2 million and won after taking HRMC to a Tribunal.
This is only if you don’t think HMRC is right; if you’re caught inside IR35 but made the necessary tax payments, then you have nothing to worry about.
Of course, if you’re within IR35 but didn’t pay the taxes you should have paid, HMRC is likely to successfully prove it, meaning you will end up with a large bill. This was the case with BBC presenters David Eaves, Tim Wilcox and Joanna Gosling who, combined, owe £920,000 to HMRC in back taxes.
What About My Expenses?
If you operate through a limited company, you can still benefit from an expenses allowance. This means that, at least until the next tax year, you can deduct certain expenses from your contract income when figuring out your deemed payment. In fact, you may have a 5% tax allowance.
We say ‘may’ because expenses are a complex matter if a contract is inside IR35, as you won’t be able to claim for things you could claim normally – for instance, you can’t claim travel, subsistence or accommodation costs. You can, however, calculate the tax you owe based on 95% of your company earnings from projects that are inside IR35.
The other 5% is the expense allowance for the running costs of the company. This allowance is non-applicable if your contract is for a public sector body.
What is a Deemed Payment?
If you’re inside IR35, you have to pay National Insurance and PAYE on the salaries you draw throughout the year. When the tax year ends, you must ensure that you made the right deductions. The salary you receive after deductions are made is the deemed payment – this is how you will receive most of your income when caught inside IR35.
More specifically, several things will impact your take-home pay, such as VAT, flat rate scheme benefits and pension payments. So, figure out the earnings your company has received from IR35 contracts in the tax year and don’t forget to deduct 5%, as well as to make any other necessary deductions.
This will allow you to work out how much income you get from the company – your deemed payment. If this number is above zero, you have to pay tax and National insurance contributions.
Should I Raise My Rates?
Considering working inside IR35 means paying more taxes than you initially thought, raising your rates is a valid action. This can help contractors to offset the cost of contracts that are inside IR35, especially when the new rules for the private sector come into play and the end client will be the one making the status deliberations.
Some contractors may worry that this will make them less attractive to clients, but raising rates is often done as a response to a changing market or to reflect a contractor’s skills anyway.
In Conclusion: Should I Still Accept Contracts That Are Inside IR35?
While you won’t have any issues if you make sure to pay the right amount of income tax and National Insurance on assignments or gigs that are inside IR35, we understand that you may be wary.
As contractor accountants, we can help you to figure out whether it’s a risk worth taking or not – it’s also important to note that, when the new changes come into effect in April 2021, the end client will have the responsibility of figuring out your employment status.
But you may not want to give up certain contracts even if they’re inside IR35, which is perfectly reasonable. For example, the contract can be a step up in your career or a very lucrative gig. No matter the reason why you want to take it on, the important thing to know is that you can still accept it. This is because IR35 status is determined on an individual project basis, so you can work on a variety of contracts.
Contact Gorilla Accounting for Professional Advice
We are limited company accountants with many years of experience, so you can rest assured that we are able to help you no matter what you require. From expert advice in IR35 to help with the latest IR35 updates to company formation services, we are a one-stop shop for all your contracting needs.
Don’t hesitate to get in touch with us today if you wish to learn more about how we can help, and we’re also available on 0330 024 0406 if you want to talk to someone.
