Dealing with Contracts Inside and Outside IR35

It is important to understand that a limited company is never ‘Inside IR35’ or ‘Outside IR35’. IR35 applies to individual contracts not to the corporate entity as a whole. A limited company may undertake a number of contracts, some of which may be Inside IR35, some of which may be Outside IR35. When considering going into business with a limited company you need to evaluate the proportion of contracts you believe you will take that are Inside IR35 versus the proportion that will be outside IR35. If you believe that more often than not you will be working on contracts Inside IR35 you should probably use an umbrella company solution such as Expat Advantage or Payroll Umbrella. With an umbrella company everything is done for you. There is no need to worry about VAT returns, PAYE payments, annual returns, annual accounts etc. For more information on Umbrella Company solutions and going into business with your own Contractor Limited Company call Commonwealth Contractors now on 0800 294 4388 or Submit your details and we will get right back to you!

Income arising from Contracts ‘Outside IR35’

Where a contract is considered to be ‘Outside IR35’ you can take company profits from the limited company in the form of dividends. This allows you to avoid large amounts of Class 1 National Insurance costs payable on income that would otherwise be paid through the Pay as You Earn (PAYE) scheme. You can also claim whatever you like in business administration expenses (as long as they are true and valid expenses) as you’re not restricted by the 5% expense rule (which applies to those Inside IR35).

Income arising from contracts ‘Inside IR35’

If a contract is Inside IR35 all earnings (other than the 5% allowed for running costs – see on) related to the contract are deemed to be salary by the HM Revenue and Customs. Your limited company must operate a PAYE scheme and deduct Income Tax and Class 1 National Insurance (employer’s and employee’s) from all salary payments. On top of this you’re also restricted when it comes to claiming business administration expenses. The HM Revenue and Customs allows 5% of contract income received to be taken in the form of business administration expenses where Inside IR35. This 5% limit only applies to business administration expenses not site based expenses such as travel and subsistence.

Keeping records of Contract Status

You’re advised to keep detailed records of all contracts taken so that you can identify IR35 contract income when making an end of year calculation. You should record which contracts were Inside IR35, which contracts were Outside IR35 and the business expenses claimed relating to each. At the end of the financial year an IR35 calculation should be undertaken. The IR35 calculation will allow you to see the final figures for ‘deemed salary’ and profit relating to Inside and Outside IR35 contract work. Once final profit figures have been established a final dividend can be paid (where not wishing to retain company profits).

When to consider IR35

IR35 status depends upon terms of the contract the company is engaged on and the actual day to day working arrangements. Often many of the working arrangements are detailed in the contract so if you fail to consider IR35 when signing a contract you may already be caught. The price of not checking contracts may be very high as the HM Revenue and Customs has the power to go back up to 6 years to recover liabilities where it has found a contract to actually have been Inside IR35. For many freelance contractors the prospect of paying backdated tax is potentially crippling.

To discuss going into business with a Limited Company call Commonwealth Contractors now on 0800 294 4388 or submit your details and we will get right back to you

Related Contractor Ltd Companies Pages:

• Contractor Limited Companies
• • Contractor Limited Companies
  • IR35 Assessment Tool
• Managed Service Companies
• • Managed Service Companies
  • MSC Involvement
• UK Dividends
• • Freelance Contractors and UK Dividends
  • Calculating and Paying Dividends
  • Dividend Tax
• Income Tax and National Insurance
• • Setting a Salary
  • Registering for PAYE
  • Income Tax and National Insurance
  • PAYE Payments and Returns
  • PAYE Investigation
• Business Expenses
• • Claiming Business Expenses
  • Contractor Expenses
  • Home Based Rules and Business Expenses
  • IR35 and 5% Expense Rule
  • Site Based Rules and Business Expenses
• VAT Guide
• • VAT Guide for Contractors
  • The VAT Flat Rate Scheme
• Timesheets, Invoices and Payments
• • Contractor Timesheets
  • Limited Company Invoices
  • Client and Agency Payments
• Section 660 and Income Shifting
• • Section 660a and Income Shifting
  • Section 660a Background
• UK Corporation Tax
• Directors Duties and Responsibilities
• Opening a Limited Company Bank Account
• Loans and Mortgages
• Contractor Limited Companies and UK Immigration