So what is IR35?
The IR35 legislation prevents ‘disguised employment’. It stops people from trying to reduce their tax liability and National Insurance, by leaving full time employment and then returning to the same job immediately as a contractor working through their own Limited company.
If your contract is caught by IR35 and you are ‘inside’, then HM Revenue and Customs will view you as having the same benefits as a permanent employer, which means you’ll have to pay full tax and national insurance contributions and won’t be able to claim certain contractor expenses.
If your contract is caught by IR35 and you are ‘inside’, then HMRC will view you as having the same benefits as a permanent employer, which means you’ll have to pay full tax and NI contributions and won’t be able to claim certain expenses.
If you are classed as ‘outside’ the legislation then you will essentially take home more of your earnings.
Some examples of being outside of the legislation are if you:
- Risk your own money through your business
- Are required to handle any loses, as well as profits
- Can bring in additional workers
- Have complete control and final say over how you work
- Use your own equipment for work – although this can be a grey area as some companies insist you use their office equipment.
When you make a claim for expenses, you only get taxed for your profits with the amount spent on your business remaining tax free; this means the higher your expenses, the lower your tax bill.
However, you must ensure that the expenses you wish to claim back were a cost that was made wholly and exclusively for the running of your business. It is also advisable that you keep hold of any receipts for at least six years. This is because HMRC could ask for evidence of your expenses from six years ago, should they carry out an investigation on your business.
Types of expenses you can claim (as a Limited company contractor outside IR35) include:
- Accountancy fees, which includes your limited company formation
- Any business travel
- The cost of work equipment
- Business telephone calls
- Business ‘entertainment’
- Computer software
- The rent, heating and lighting of your business premises
- Stationary and postage for work
- Books and magazines that are relevant to your business
- Bank charges on business accounts
- Meal allowance, which can be claimed when working on a remote site
- Employers NI contributions.
If, however, your contract is caught by IR35 then you can only claim for:
- Administration expenses which are fixed at 5% of your contract income
- Travel and accommodation expenses
- Pension contributions
- Certain professional subscriptions.
If you have any questions regarding expenses, or any other financial issues, such as whether you fall inside IR35, then it’s always best to seek professional advice from a contractor accountant. Visit SJD Accountancy’s IR35 hub for more information on this topic.