The IR35 Status of contracts you are working further to will have a major implication on the way you structure your Contractor Limited Company Income. If contracts are ‘Inside IR35’ you need to pay employed levels of tax, however, if contracts are ‘Outside IR35’ you can structure your income to achieve a tax advantage by taking Dividends.
If you are a highly skilled professional and you are considering going into business with your own Contractor Limited Company Commonwealth Contractors can help. We partner with Chartered Accountants who specialise in contractor accounts and can help to maximise your net contract retention.
Budget 2012 update: During 2012-13 there will be a consultation; subject to its results, the plan would involve ‘requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged’. This can be expected to target the highest level contractors who input at board-level to their client organisations.
To speak to an experienced advisor call Commonwealth Contractors now on 0330 390 9021 or Submit your Details and we will get right back to you!
What does IR35 apply to?
IR35 does not apply to the corporate entity as a whole; it simply applies to individual contracts that the Limited Company Contractor is engaged upon.
When considering whether to go into business with a Contractor Limited Company you need to try to evaluate how many of the contracts you will be working further to will be Inside IR35 and how many will be Outside IR35.
If on balance more of your contracts will be Inside IR35 it will be better to forget about running a Contractor Limited Company altogether and concentrate on finding a good Umbrella Company. If however more contracts are likely to be Outside IR35 it is well worth starting your own Contractor Limited Company.
Contract Income ‘Inside IR35’
If a contract is deemed to be ‘Inside IR35’ you will not be able to take contract income in the form of profits. Rather, you will have to pay employed levels of Income Tax & National Insurance on billings generated further to contract.
To remunerate yourself you will need to run a Pay as You Earn (PAYE) scheme and you will need to deduct from salaried income;
- Income Tax (at 0%, 20%, 40% and although unlikely 50%)
- Employees National Insurance (at 12% and 2%)
- Employers National Insurance (at 13.8% uncapped)
You can claim some genuine business expenses however these are capped at 5% of contract income received. This 5% limit only applies to business administration expenses not site based expenses such as travel and subsistence.
Contract Income ‘Outside IR35’
If a contract is deemed to be ‘Outside IR35’ you can take profits from the business and thereby avoid large Employers National Insurance Contributions (at 13.8% uncapped). You can also claim whatever genuine business expenses you like (not capped at 5% of contract income).
Validating IR35 Status
It is your responsibility to maintain detailed records to validate your IR35 status. If you fail to keep detailed records the HM Revenue and Customs could well question whether dividend income should have been taken which could lead to an in depth investigation.
You should keep hold of contracts the company has worked further to and you should also maintain records to validate that you are in business on your own account (i.e. using the limited company’s computer to deliver the project, working remotely etc).
Find Out More
To find out more about Contractor Limited Companies and to discuss your situation with a professional advisor call Commonwealth Contractors now on 0330 390 9021 or Submit your Details and we will get right back to you!