Accounting for contracts which are inside IR35 and outside IR35 in the same tax year

**mudskipper** · 2 October 2012, 05:21

Originally posted by MoodyBlue View Post

Hi,

Firstly, thank you to every one who has posted such helpful information.

I am currently a permie, I have been offered a 6 month contract which will net me about £1000 extra a month so I'm considering accepting it.

The position as far as I can tell without having being sent a draft contract (I've requested one) and from thinking about whether day-to-day I would be any different makes me believe that the contract is firmly inside IR35 - I wouldn't be able to substitute myself for instance. Since the duration is 6 months I would look for another contract after it ends. If that contract happens to put me firmly outside of IR35 then I'll want to award myself dividends.

But, I can't find anything useful to help me with working out how I would calculate the tax, should I try or just sign up my limited company with some one like crunch.co.uk? Is it even correct to operate like this? Or would I be better offer closing the company and creating a new one with a new business account?

Thank you.

It's not a problem - you're salary would be higher and your divvys lower than you would typically declare if you'd been outside IR35 for the whole year. However from a tax point of view, your tax year runs Apr-Apr, so six months now would just about mean you'd paid full tax for the whole year in any case. If you're setting up a ltd company, you really should get an accountant who will do the tax and payroll for you, but, if it's your first contract and you're going to declare yourself inside IR35 anyway, you may be better to go with an umbrella who will deal with all the tax/payroll stuff for you.

**MoodyBlue** · 2 October 2012, 06:39

Thanks for reply mudskipper.

From what I've read it seemed to me that having my own LTD was better than using an umbrella, though a little more hassle but I don't mind that.

I'll definitely be getting an accountant, I don't know any personally so I'll be looking for an organisation. Crunch.co.uk seem nice and simple but I've not seen any one mention them let alone recommend them?

**Clare@InTouch** · 2 October 2012, 07:16

Pretty much agree with the above.

Your salary will need to be based on 95% of the contract income received from the inside-IR35 work, then you're free to do as you wish with anything left. Pension contributions reduce the IR35 deemed salary, so you may wish to consider upping your company contributions for this year (better in your pension than in HMRC's pocket).

You will be slightly better off using a Ltd rather than a Brolly, partly due to the expenses you can claim and also because of flat rate VAT. You could go Brolly then swap when you're outside IR35, or set up the company now. At least then you're ready to go when you get your next contract.

**northernladuk** · 2 October 2012, 09:58

Don't forget that the chance of getting end to end contracts, particularly if you are new isn't high so you will need a warchest to back you up if you can't find something for a couple of months. It isn't all as rosey as you think so plan on only working 10 months of the year and if you get a full 12 months in then treat that as a bonus.

I presume you won't have a big warchest so your first contract will be focussed on getting some savings so I very much doubt if you do it properly your first month will net you more than your permie in your pocket but it is a short pain to a long career in contracting.

**BlasterBates** · 2 October 2012, 10:37

I would talk it through with an accountant.

**MoodyBlue** · 2 October 2012, 10:38

Originally posted by Clare@InTouch View Post

Pretty much agree with the above.

Your salary will need to be based on 95% of the contract income received from the inside-IR35 work, then you're free to do as you wish with anything left.

Thanks for the reply Clare. When you say "salary will need to be based on 95%" do you mean that salary will be 95% of contract income? Or did you mean the salary can be up to 95% of contract income? I think the former is correct?

**Clare@InTouch** · 2 October 2012, 10:40

Originally posted by MoodyBlue View Post

Thanks for the reply Clare. When you say "salary will need to be based on 95%" do you mean that salary will be 95% of contract income? Or did you mean the salary can be up to 95% of contract income? I think the former is correct?

That's right - the salary will need to equal 95% of the contract income. It's on a cash basis too, so what you receive rather than what you invoice. That could (depending on when you're paid) spread the deemed salary across two tax years, which could be more tax efficient.

**MoodyBlue** · 2 October 2012, 10:42

Originally posted by northernladuk View Post

Don't forget that the chance of getting end to end contracts, particularly if you are new isn't high so you will need a warchest to back you up if you can't find something for a couple of months. It isn't all as rosey as you think so plan on only working 10 months of the year and if you get a full 12 months in then treat that as a bonus.

I presume you won't have a big warchest so your first contract will be focussed on getting some savings so I very much doubt if you do it properly your first month will net you more than your permie in your pocket but it is a short pain to a long career in contracting.

Indeed, I'm in no fantasy about contracting. I do have a warchest, it'll cover at least 8 months sitting on my arse. What you say is so very important though. Since the contract I have is in IR35 (and I don't think I can make the contract or the work practice ouside of IR35) I'll be taxed a lot. I'm still weighing up whether the ~£10k p/a is worth the hassle/risk.

**northernladuk** · 2 October 2012, 10:43

Originally posted by MoodyBlue View Post

Indeed, I'm in no fantasy about contracting. I do have a warchest, it'll cover at least 8 months sitting on my arse. What you say is so very important though. Since the contract I have is in IR35 (and I don't think I can make the contract or the work practice ouside of IR35) I'll be taxed a lot. I'm still weighing up whether the ~£10k p/a is worth the hassle/risk.

You don't count contract money as p/a. Your next contract maybe more/maybe less. It is a day rate for the duration of the contract (which also isn't always as advertised for one reason or another). If you do go contract you need to drop all the permie thinking such as this.

Accounting for contracts which are inside IR35 and outside IR35 in the same tax year