The Devil is in the Detail
For contractors, one of the most common questions is whether you fall inside or outside the scope of IR35. IR35, if you are not already familiar with it, is the government’s legislation to crack down on the avoidance of tax and national insurance contributions through the use of intermediary companies. This has typically targeted freelancers and contractors. What does it affect? How you calculate your take-home pay.
If you check around the web, you’ll find a vast array of IR35 calculators that attempt to identify whether you fall inside or outside its regime and then how much your take-home pay will be for a particular contract. The problem is though, everybody’s circumstances are different and contracts are different too. Just so many different variables that can affect the outcome, from your business goals to your daily rate, expenses, pensions and capital purchases. So, getting reliable and accurate calculation is very difficult. The government’s own calculator – a downloadable spreadsheet is as good as any. Don’t worry, they don’t track its use!
Go ahead, get a rough idea, but then come back and talk to one of our experienced business professionals who can help you work out the best way to run your business and minimise your taxes – that’s why we are here and we’d love to work with you.
Don’t Give Yourself the Benefit of the Doubt – HMRC Doesn’t
The other problem with assessment calculators like this is that natural human trait to give yourself the benefit of the doubt which could mean the difference of working inside or outside of IR35 – it’s just a shame that HMRC doesn’t do that!
Getting an idea of where you stand on IR35 is just one part of the story. Many contractors assume that just because a contract is inside IR35, they need to consider working through an Umbrella company. Dig a little deeper and you’ll find that there are several advantages of working through a limited company inside an IR35 bound contract. for instance:
- If you operate on the VAT Flat Rate Scheme, your take-home pay may be higher because of the benefits – not so for an Umbrella company as that scheme isn’t available.
- You only pay tax on 95% of your income in deference to the 100% you’d pay using an umbrella company.
- The fees associated with using an umbrella company can be as high if not higher than those of an accounting firm.
- You can mix and match where contracts are concerned, meaning a contract maybe inside IR35 and another outside of IR35, using the same limited company – giving you both a salary and tax efficient dividends.
Get it Right First Time
It’s important to get this right and pay the right amount of tax, because the tax investigation window is 5 years and if you are found to have falsely operated outside of IR35 you could be ordered to pay back the underpaid tax or have to pay a penalty and interest.