Better off beight caught by IR35?

[jetrimby]

Hi From the Revenue's own site an example sorry havent linked it properly so you will have to type!

www.hmrc.gov.uk/leaflets/calc_deempyt.htm#4

The 5% deduction is from GROSS income (excluding VAT if registered) before ANY deductions.

YOu then take off further expenses that would be allowable for an employee (business travel (40p/25p) etc NOT accountancy and company running costs)
You can then take off expenses that the employee of the company has paid tax on (via a P11D) say medical insurance/company car
then less wages and on into calculation
The point is that per their own example the 5% is the very first deduction from the gross income (this would include expenses if you charged them on)
so you get the absolute max. from the 5%

Must admit these forum sites do a good job of refreshing one's memory (and distracting me from doing tax returns - must get on!)

[malvolio]

Hi From the Revenue's own site an example sorry havent linked it properly so you will have to type!

www.hmrc.gov.uk/leaflets/calc_deempyt.htm#4

The 5% deduction is from GROSS income (excluding VAT if registered) before ANY deductions.

YOu then take off further expenses that would be allowable for an employee (business travel (40p/25p) etc NOT accountancy and company running costs)
You can then take off expenses that the employee of the company has paid tax on (via a P11D) say medical insurance/company car
then less wages and on into calculation
The point is that per their own example the 5% is the very first deduction from the gross income (this would include expenses if you charged them on)
so you get the absolute max. from the 5%

Must admit these forum sites do a good job of refreshing one's memory (and distracting me from doing tax returns - must get on!)

Oops, quite right.

Just re-read my original article on the subject based on the HMRC stuff you quoted. The 5% comes off first. Also accountancy fees are covered by the 5%.

(Note to self - read what you're posting before hitting "Submit"!!! ).

[Julius Caesar]

The famous Five Percent mentioned here applies to the IR35 calculation only.

That is, when you check to see whether IR35 demands that you pay more tax, you start with your gross, take off 5%, then take off allowable expenses.

"Allowable" expenses are those that an employee would have (e.g. business travel). The 5% is to cover expenses that an employee would not have, such as an accountant's fees.

The point is that this is a separate calculation for IR35 purposes only. This is NOT your basic accounting calculation of income, expenses, and tax. For that calculation, only expenses that you actually spent are allowed.

So it is not true that you can "claim 5% whether you have spent it or not". you can't CLAIM it, all you can do is calculate your IR35 liability using it.

[MPwannadecentincome]

Oops, quite right.

Just re-read my original article on the subject based on the HMRC stuff you quoted. The 5% comes off first. Also accountancy fees are covered by the 5%.

(Note to self - read what you're posting before hitting "Submit"!!! ).

and please don't be so quick to jump down our throats when we get it wrong....

[OrangeHopper]

and please don't be so quick to jump down our throats when we get it wrong....

He did that to me once. Admittedly I was wrong but did I feel a fool after the telling off I got.

[malvolio]

and please don't be so quick to jump down our throats when we get it wrong....

Aw, come on... That's half the fun...

OTOH I always admit when I do get it wrong!

[OrangeHopper]

Aw, come on... That's half the fun...

OTOH I always admit when I do get it wrong!

Go and stand in the corner for a moment and reflect on thy ways.

[IR35 Avoider]

IR35 requires that 95% of caught cash received by the company in the personal tax year be paid out (or treated as paid out) with regard to the relevant employee. The total of their salary, employers NI on their salary, company contributions to their pension scheme, and employee expenses they can claim from the company (for example travel to a temporary workplace) must all add up to the 95% figure. I refer to this collection of items as "employee costs." By "salary" in this context, I mean actual or deemed, since if "employee costs" don't add up to 95%, the difference will be treated as though it had been spent on salary, i.e. it will be treated (i.e. taxed) as "deemed salary."

All sorts of complications and potential for double-taxation can occur if you allow deemed salary to arise, so my advice if caught is to always make sure you pay enough actual salary, pension contributions and employee expenses to get to the 95% target and thus prevent deemed salary arising. Don't forgot that IR35 is cash-based, so a March invoice the money for which hits the company bank account after 6th of April falls into the following tax year.

The "5%" allowed for expenses under IR35 is the amount that the company is allowed to use for purposes other than "employee costs" as defined above. The company can use it to pay company expenses, e.g. accountancy fees, and if the actual amount laid out on company expenses is less than 5%, the rest (the company profit) is subject to Corporation tax. The profits net of tax can be retained in the company or distributed as a dividend.

In short, the 5% IR35 allowance is money that the company is allowed to spend on expenses other than than those tied to employing the relevant person, but the company doesn't have to spend it, and to the extent it doesn't (and doesn't spend it on "employee costs" in excess of the 95%) it is taxable profit.

[IR35 Avoider]

An example may be helpful.

The company invoices 100K+VAT, all income is deemed to be IR35 caught, and all payments arrive in the company bank account between 6th of April 2009 and 5 April 2010, i.e. the same tax year.

IR35 requires that 95K be spent on the employee, for example
Salary 37K
Employers NI 4K
Legitimate travel expenses 2K
Employer Pension Contribution 52K


IR35 allows the other 5K to be spend on other company expenses. In this example the only other expense is the accountant, who let us say costs £1K. That leaves 4K gross profit which is taxed at 21%, leaving a little over 3K as net profit. The 3K can be paid a dividend or retained within the company for future use.