Intermediaries legislation, most commonly referred to as ‘IR35’, was introduced in April 2000 to prevent workers from contracting through a limited company (either their own or an intermediary umbrella firm) as a way to disguise employment and pay less Income Tax and National Insurance. Contractors who carry out work that falls under IR35 legislation do not have the same level of control, responsibility and financial risk as limited company directors, so they must pay full Income Tax and National Insurance on their earnings, and they cannot claim as many expenses. By contrast, contractors who are subject to IR35 can minimise their personal tax liability by taking a salary and dividends from company profits, and they can also claim tax relief on more business-related expenses.
What you can claim
If IR35 applies to any of your contracts and you work through your own limited company, you can only claim tax relief on the expenses an employee would ordinarily claim from his or her employer. They are as follows:
• General administrative costs of 5% of gross IR35 income:
– Business premises, including a home office
– Administration and secretarial support, e.g. telephony costs
– Broadband charges
– Computer equipment
– Accountancy fees
– Stationery, postage and printing costs
– Training costs
– Looking for contracts
– Bank interest
– Hire purchase payments
• Pension contributions
• Some professional subscriptions
• Business insurance, e.g. professional indemnity insurance.
• Accommodation and food when not based at usual workplace
There is no need to demonstrate the particulars of the 5% general administrative expenses or keep receipts. HMRC will allow this deduction in all cases, even when there is no expenditure at all, so you will only pay tax on 95% of your income.
If you contract through an umbrella company rather than your own limited company, you will not be able to claim the 5% deduction but you’ll still get tax relief on the other expenses stated above.
Changes to IR35 expenses from April 2016
Restrictions to travel and subsistence expenses for IR35 contractors were announced in the Budget 2015 and will be effective from April 2016. If you are employed through an umbrella firm or your own limited company and are caught by IR35 legislation, you will no longer be eligible to claim tax relief on these expenses. The reason being that tax relief on work-related travel and subsistence is not available to permanent employees who, essentially, have the same level of control and liability as IR35 contractors, which is minimal in comparison to true self-employed workers and limited company directors.
These changes will not affect contractors who working outside IR35, so you will still be able to claim tax relief on the full range of expenses for any contract work outside the legislation, even if some of your other contracts are inside IR35.
Can I still benefit from contracting through a limited company?
Irrespective of IR35 rules and the forthcoming restrictions on expenses, many contractors can still benefit from working through a limited company. Even more so if some of their contracts are outside IR35. But this will only be financially beneficial when you start earning around £25,000. Below that, the potential tax savings are not that significant to justify the additional accounting and filing requirements, unless you’re able to do your own bookkeeping and tax returns instead of paying an accountant.
If you decide to contract through a company, it may be more beneficial to form a limited company rather than working through an umbrella. You cannot claim the 5% tax free expenses if you contract through an umbrella company. Furthermore, their fees tend me be quite high, sometimes even more than accountancy fees.
About Rapid Formations: Based in London and Glasgow, Rapid Formations is a leading online company formation agent, setting up UK limited companies and LLPs for clients in the UK and overseas. They also specialize in providing company address services from their locations in Covent Garden, London and Bath Street, Glasgow.