IR35 and 5% Expense Rule

Limited Company Contractors need to consider the effect IR35 has on claiming business expenses.

If the contract your limited company is working further to is considered to be outside IR35 you may be able to claim many types of business expense. As you are providing consultancy services and are not deemed to be a ‘disguised employee’ of the client it may be possible to claim company administration expenses such as the cost of your business premises, Accountancy and Tax advice, Professional Insurance cover etc. These business administration expenses are on top of business expenses incurred further to work on a client site (e.g. travel and subsistence).

However, where your limited company is working further to a contract that is Inside IR35 you will find that you are restricted by the HM Revenue and Customs on what business administration costs you can claim. The HMRC will allow you to claim 5% of contract income as an administration expense allowance where Inside IR35. This allowance covers company administration expenses such as:

• Business premises
• Accountancy and Tax Advice
• Contract finding costs
• Professional Insurance Cover
• Computer equipment
• Training costs
• Bank charges

Claiming the 5% Expense Allowance

The 5% expense allowance can be claimed by a contractor at the end of the financial year once an IR35 calculation has been undertaken. The IR35 calculation would look at all contract income generated by the limited company in the financial year and work out the proportion that was earned further to contracts considered Inside IR35.

Site Based Expenses

The IR35 legislation only affects business administration expenses incurred by the company; it does not affect site based expenses such as travel to and from the client site, overnight stay in a hotel or B&B, site based subsistence etc. Freelance contractors only need to ensure that they are complying with Site Based Rules when claiming expenses further to a temporary client site.

Solutions for Contractors Inside IR35

If you find that you are working on a number of assignments that are considered to be Inside IR35 a contractor limited company may not be the best option for you. Where Inside IR35 you will lose the benefits associated with a limited company (i.e. ability to take dividends) while still incurring the increased costs and administration. To find out umbrella company solutions such as Expat Advantage and Payroll Umbrella contact Commonwealth Contractors now on 0800 294 4388.

To find out more about going into business with your own Limited Company call Commonwealth Contractors now on 0800 294 4388 or submit your details and we will get back to you.

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