Reply to: IR35 and PAYE Question

Re: Re:Umbrellas

What I'm saying is that the second part of the above should read -
Umbrella = claim all travel expenses, training costs, relocation costs etc. Everything else treated as salary
Training costs, for example, are specifically part of the 5% under IR35

... but could be paid by an umbrella company as expenses without being subject to the 5% limit.

This seems like a good point to me, for those who aren't bothered about dividends but do want training. Did I miss the other side's answer to this point?

Re: Yep

If one doesn't have a material interest what payments can be legitimately received outside of schedule E?

There are a few, the most obvious being dividends where shareholdings are low enough for their not to be a material interest. (i.e. more than 20 contractors get together etc.)

These payments are "legitimate" - the company can legally make them - but potentially caught. The company or the contractor can be held liable for the tax on them. (Though to be more precise, only the company can be held liable for the employers NI.)

Re: Confused (again)

As I thought, IR35 Avoider,and many thanks. A direct and informative answer to the question (assuming there are no takers on your answer). I hope this thread has helped some of us newbies.

The kids will eat this Xmas (blimey Xmas already) with a fair cash flow wind!

BTW I'm going with the Ltd rather than Umbrella, because:
- It will be a learning experience that I am not going to shy away from
- I have some other non-contracting ideas that a Ltd company can only serve to move me to the Business-Man status

Re: Confused (again)

it's gone straight over my poor IT focussed head

Actually it's not really relevant to you - if you join an umbrella that only ever pays you salary and expenses and as long as your expenses are genuine then you have nothing to worry about, you can forget about IR35.

If I ever used an umbrella I would find one that would also pay gross contributions into a personal/stakeholder pension scheme, that way I'd avoid NI as well as tax on my contributions. (Pension counts the same as salary for IR35 so that's still not an issue.)

If you operate your own company and paid 95% of you contract income out in Gross salary, employers NI, Pension contributions and expenses that are allowable for the employee (as opposed to the wider range of expenses allowable for the company) then you are doing the same thing as the umbrella company would do, except that you have an opportunity to make a small profit (and pay a dividend) on the other 5%. (Training and accountants fees are examples of expenses that would come out of the 5% before the company could make a profit, I think travel expenses if circumstances allow could come out of the 95% as they are a legitimate employee expense.)

If you do pay all of the 95% out in one of the four ways I mentioned, then you are already doing what the Inland Revenue wants and what IR35 was designed to force you to do. There is no more to pay.You are paying a lot more than someone who thinks they are not IR35 caught and just pays dividends. This is why some of us get so upset with umbrella companies that claim to be IR35 "solutions" - the problem was the Inland Revenue trying to double our tax bills, their "solution" is to pay up and eliminate any possibility of keeping the bills down!

Confused (again)

Thanks IR35 Avoider for that, but ** whizzzz ** it's gone straight over my poor IT focussed head...

If I operate like an umbrella would and pay all income to my Ltd company (100% shareholder) - after expenses - as PAYE salary and no dividends will I owe any more tax? I realise that this is not the most tax efficient way, but I do need a personal regular (hefty) income (kids, house, etc)

Also, from what IR35 Avoider points to, doesn't the contractor somehow have a 'material interest' in an umbrella company (as an intermediate) and therefore the client?

Yep

You're correct. It is an or.

What I can't work out is what it can catch (not partnerships because they are dealt with by section 4).

If one doesn't have a material interest what payments can be legitimately received outside of schedule E?

Re: Re:Re: Umbrellas

To be factual. It is.

Caveat: unless of course you were referring to the ability to control 5% or more without actually owning it in which case it could still apply.

You are wrong, and even with your caveat you are still wrong. See schedule 12 clause 3.1.b of Finance Act 2000.

If a payment or benefit received directly from a company intermediary

can reasonably be taken to represent remuneration for services provided by the worker to the client.

then you are caught. You do not have have a material interest in the intermediary (clause 3.1.a) which is where the issue of owning shares or controlling 5% comes in.

Edited to add clause 3.1 in its entirety.

3. - (1) Where the intermediary is a company the conditions are that the intermediary is not an associated company of the client that falls within sub-paragraph (2) and either-

(a) the worker has a material interest in the intermediary, or
(b) the payment or benefit mentioned in paragraph 2(1)(b)-
(i) is received or receivable by the worker directly from the intermediary, and
(ii) can reasonably be taken to represent remuneration for services provided by the worker to the client.

Clauses 3(3) and 3(4) you mention define material interest, which is irrelevant if you are caught by 3(1)(b).

Re:Re: Umbrellas

Thanks 4C.

I agree that if your committed to being a contractor then the limited company route is almost always going to be the best route.

I'd also have to say that umbrellas do have a place for those who are still commitment shy or who don't like the responsibilities/rewards of having their own business. It's a bit of a price to pay longer-term, however.

I also agree that there are an awful lot of umbrellas out there who are happy to fudge over the issue of per diem expenses. Whoever you are you cannot claim more than you pay out as expenses.

5% expenses - the left overs

Will be subject to the new CT rules from 1 April 04. If £2k was left over and you declared a dividend, the new CT rules would reduce this dividend to £1,681.

Of course you could buy a new computer worth £2k and reclaim the VAT, could be worth it if are you under new Flat Rate VAT scheme.

Re: Re:Umbrellas

5% of turnover = approx £3k for most.

Cheap accountancy = cheap umbrella = same cost = approx £600 + VAT, which leaves over £2K.

Bank charges - what are they ? - send me a private email if you want the details of a bank that doesn't charge.

Relocation - I've claimed it for my move from Somerset to Coventry but from my experience it's a very rare thing to claim. I know a lot of contractors but have not come across anyone else that has actually claimed relocation.

Training should be a regular expense but most of my colleagues don't bother and if they do it's cheap internet based courses.

I think we are getting a little pedantic here and have completely missing my point which may be because I didn't explain it properly.

The structure of umbrella accounts is very similar to a ltd working through IR35 where the vast majority of income is taxed as PAYE. There is no real financial benefit from using an umbrella and I would say that the 5% of turnover that could be claimed through a limited would produce more financial benefit than the training and relocation from an umbrella for the average contractor - unfortunately the expense debate is getting anally retentive and misses the point.

The point I am making has been made on previous threads and is that certain umbrella companies make statements inplying that they get around IR35 in the way that a non-IR35 ltd would.

You and I would not be caught out by this Bradley but clearly newbies have been mislead. It works along the same lines as the expense dispensation hoodwinking newbies into claiming expenses they have not incurred. In other words it is a new liebore style play on words to make their services look better than they actually are.

Have I made myself clear this time or am I going to have to hunt around for those old threads to make my point ?

Re:Umbrellas

IR35 Ltd company = claim all travel expenses, claim up to 5% of turnover as expenses. Everything else treated as salary

Umbrella = claim all travel expenses. Everything else treated as salary

Therefore the ordinary umbrella arrangement misses out on the up to 5% of turnover claimable as expense via a limited company.

What I'm saying is that the second part of the above should read -
Umbrella = claim all travel expenses, training costs, relocation costs etc. Everything else treated as salary
Training costs, for example, are specifically part of the 5% under IR35 but not if you're outside the scope of IR35.
And I would have to say that at least part fo the 5% is always eaten up with admin charges like accountancy fees, bank charges etc.

Eh?

To be pedantic, it's not enough not to be a shareholder.

To be factual. It is.

Caveat: unless of course you were referring to the ability to control 5% or more without actually owning it in which case it could still apply.

See FA 2000 3 (3) an 3 (4). Could be diffferent sections in FA2004 of course.

Eidt, oops that's crap. It's an OR.

Re: Umbrellas

you will be outside of IR35 if you're not a shareholder

To be pedantic, it's not enough not to be a shareholder, you also need to not receive any non-PAYE income that could reasonably taken to be proceeds of individual contracts.

A normal umbrella pays everything as salary, which does indeed put you legally outside the scope of IR35, but without making you better off.

IR35 was intended to increase the amount of contractor income that was taxed as salary - it's hardly surprising that joining an umbrella where all your income is taxed as salary is going to put you outside the scope of it. (Obviously expenses are not taxed as salary, but then they aren't income either, they are costs, which I generally try to minimise and have typically managed to keep below 2K per year.)

I guess there may be some circumstances where a contractor with very high expenses can reclaim something through an umbrella that he couldn't reclaim through his own company, however my expenses would have to increase a few hundred percent before this even became an issue, so I find it difficult to imagine. I suppose the sort of contractor who might be better of through an umbrella is someone earning 30K - 40K per year who spends 5K on courses and would definitely be IR35 caught if contracting through his own company.

Re: Umbrellas

Bradley I'm confused by your argument so please explain things clearly to me.

IR35 Ltd company = claim all travel expenses, claim up to 5% of turnover as expenses. Everything else treated as salary

Umbrella = claim all travel expenses. Everything else treated as salary

Therefore the ordinary umbrella arrangement misses out on the up to 5% of turnover claimable as expense via a limited company.

Have I missed something here or are we talking at cross purposes ?

Re: Umbrellas

The point is these umbrella companys imply that by joining them you will be avoiding IR35

If you do join an umbrella you will be outside of IR35 if you're not a shareholder so how's that misleading?

and gain some sort of financial advantage

Well you do because the range of expenses you can claim is greater
How is it misleading to say these things?