Contractor Accounts Service and IR35 Issues

Important Information

Please note that major changes to the UK tax system were announced in 2015, which directly affect contractors.

Please see our Contractor Tax Changes webpage for more details.

We operate a full Accounts and Tax service for Contractors.

Our service includes Limited Companies, Year End Accounts, Corporation Tax, PAYE, VAT Returns.

We also make clients aware of Qdos Contract Review and Insurance Cover for accounting fees in the event of an IR35 investigation.

Our prices are typically from £80 per month (we are not registered for VAT) please click for more details.

IR35 Basics

IR35 is a UK tax rule which is designed to identify contractors who are paid through an "intermediary" limited company, but in reality the HMRC believes they are effectively employees and therefore should be treated as such for tax purposes.

IR35 applies to Limited Companies and Partnerships and does not apply to Sole Traders.

Contractors should consider the IR35 implications of their contracts and working practices when providing a service to a single client over a significant period, eg. a year.

It is often legitimate for a contractor to trade through a limited company and be taxed as a normal limited company and stay outside of IR35.

We recommend that contracts and day-to-day working practices are reviewed by experts, eg. Qdos which may also enable the contractor to take out tax investigation and back tax insurance.

IR35 Check List

When HMRC becomes aware of contractors operating through a limited company, they look at the contracts and working arrangements to determine whether or not the independent contracting situation genuinely exists.

This is a list of some of the issues to consider.

When HMRC examine a contract and working arrangements, they will specifically look at, but not exclusively:

• The time period of the contract.
• Is the contractor an 'office holder' of the client company eg. director, including responsibilities such as control over strategy and budgets?
• Is the contractor in a line management position, including having a senior job title, and has responsibilities of staff supervision, evaluation and direction?
• Is the contractor covered by their own insurance?
• Whether the contractor will be able to send someone else if they are unable to get to work, known as substitution, and whether a substitute has been provided in the past.
• Whether the contractor is required to attend work at specific times as other employees, or can he/she come and go in their own time.
• Whether the contractor works in their own premises for some of the time.
• Whether the contractor works independently with their own skill and expertise, or are regularly controlled, instructed and supervised by the client.
• Is the contractor required to correct errors without pay?
• Whether there are specific clothing requirements, and who pays for these
• Whether the contractor is required to provide his/her own equipment.
• Length of notice period - eg. is it similar to an employee or much shorter?
• How well integrated the contractor is with other staff, eg. using the canteen and discounted meal prices.
• Was the contractor previously employed by the client?
• Whether the day-to-day working practices and general arrangements confirm the independence of the contractor.

Contracting and IR35 - Other Matters to Consider

Some client companies insist on contractors providing services through a Limited Company.

A big advantage of being 'self-employed' rather than 'employed' is that usually you can save some tax and national insurance.

This is why HMRC are keen to ensure that people who are effectively 'employed' are treated as such tax purposes.

Contractors are potentially assessed on a 'contract by contract basis' rather than their business as a whole.

The easiest way to avoid IR35 is to be a self-employed Sole Trader. However, HMRC may still be deem you to be employed under other rules.

Expense Claims - Inside IR35

Limited companies inside IR35 can claim a 5% (of turnover) Expense Allowance. So if the limited company had an annual turnover of £80,000, then at a Corporation Tax rate of 19% (2017/18) the tax saving is £760.

The 5% Expense Allowance will pay most of our accounting fee. This tax saving is not available if being paid through an umbrella company.

Travel and subsistence can be claimed under the regulations which would apply for any employee of a business. In particular this means that journeys to a temporary workplace will be allowable subject to the 24 Month Rule. Journeys between a permanent workplace and home is not tax deductable.

Umbrella Companies

If your services and limited company are "inside IR35", then you may consider an alternative which is to sign up with an "umbrella company" where these specialists will look after the tax issues for you, but this service can be expensive in fees.

You would be an employee of the umbrella company.

By contracting through an umbrella company, you would be almost certainly conceding that if you alternatively contracted through an "intermediary" limited company you would be caught by IR35.

The advantage of contracting through an umbrella company is therefore that your remuneration package is taken care of and there are no IR35 concerns.

The major disadvantage of the umbrella company is that you would pay a similar amount of tax and national insurance to being an ordinary employee of the client, and also pay relatively high fees.

You would lose out on the 5% (of turnover) Expense Allowance which 'inside IR35' limited companies are allowed.

Travel and subsistence can be claimed under the regulations which would apply for any employee of a business. In particular this means that journeys to a temporary workplace will be allowable subject to the 24 Month Rule. Journeys between a permanent workplace and home is not tax deductable.

GAAR and Penalties

Please note that HMRC have been given more funding to tackle "disguised remuneration schemes".

Under the General Anti-Abuse Rule (GAAR) HMRC may charge penalties, in addition to the historic back-tax, where they decide that a company is an IR35 Personal Service Company (PSC), which had not previously declared itself to be.

More Information

More information from HMRC: A general guide to IR35