Reply to: Better off beight caught by IR35?

[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.

[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.

[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.

[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]

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.

[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....

[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.

[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"!!! ).

[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!)

[MPwannadecentincome]

I'm getting a headache...

Which bit of "the money you are claiming back is for something paid for out of taxed income" did you not understand?

And the 5% in IR35 is nothing to do with expenses. Take your gross, deduct allowable business expenses such as pension, travel, accomodation, accountancy fees and the like (but not training) and you get a balance. Take 95% of that balance. That's what you pay PAYE and NICs on regardless of how much you actually take out of the company.

Seriously if you don't understand the basics, go with an umbrella and stop wasting everyone's time. This is not a game for amateurs.

OK............ I bow to your superior knowledge on this - I must have been misled under the impression that the 5% was on the gross income and could be used to reduce tax on salary whether the expense was incurred or not.

And if we don't understand the basics - we can learn - sorry to have troubled you but you don't have to treat us all like idiots only fit for brollies - everyone has to start somewhere - the material may be there to read but it is easily misunderstood to those who are new to it.

[norrahe]

Speak to an accountant!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[d000hg]

I have to say that I dont understand this IR35 thing you have in the UK.

Either you are in business on your own account or you are a disguised employee, regardless of Ltd Cos etc.

PZZ

Sssh, HMRC will use this as evidence that contractors are knowingly cheating the system.

The UK doesn't have friendly rules towards sole traders, which is the 'proper' self-employed way to work. So UK contractors set up companies. But it's not fair they then have to pay all the employer taxes as well as employee taxes on their income, hence dividends redress the balance somewhat.

[OrangeHopper]

I'm getting a headache...

Which bit of "the money you are claiming back is for something paid for out of taxed income" did you not understand?

And the 5% in IR35 is nothing to do with expenses. Take your gross, deduct allowable business expenses such as pension, travel, accomodation, accountancy fees and the like (but not training) and you get a balance. Take 95% of that balance. That's what you pay PAYE and NICs on regardless of how much you actually take out of the company.

Seriously if you don't understand the basics, go with an umbrella and stop wasting everyone's time. This is not a game for amateurs.

I'm going to regret doing this but I can't help myself.

I have always taken 95% of the sales gross, then deducted allowable expenses before paying the rest as PAYE/NI. I also disagree that accountancy fees are an IR35 allowable expense and they are paid out of the 5%. I do agree that the other expenses you have quoted reduce your deemed payment.

[malvolio]

I'm getting a headache...

Which bit of "the money you are claiming back is for something paid for out of taxed income" did you not understand?

And the 5% in IR35 is nothing to do with expenses. Take your gross, deduct allowable business expenses such as pension, travel, accomodation, accountancy fees and the like (but not training) and you get a balance. Take 95% of that balance. That's what you pay PAYE and NICs on regardless of how much you actually take out of the company.

Seriously if you don't understand the basics, go with an umbrella and stop wasting everyone's time. This is not a game for amateurs.

[MPwannadecentincome]

NO my understanding (which I am sure is right) is that you can claim UP TO 5% in expenses you do not have an automatic right to the 5% deduction

If someone can prove me wrong I am always happy to stand corrected!

I'm no expert, and its complex:

In granting the 5% allowance, HMRC do not require proof of expenditure and the full 5% is granted, even if there is no actual expenditure whatsoever.

Other expenses

Note that the 5% allowance is only for "administration" and is to cover the ten points above. In addition to the 5% for administration costs, a contractor can also claim direct costs such as travel, computer costs, subsistence, direct training, sub contractors, etc.

Allowances for corporation tax

The 5% is in respect of the deemed salary calculation only and is not taken into account when preparing the company’s accounts and corporation tax computation.

The company accounts will take into account the actual expenses only, which may be higher or lower than the 5% allowance.

hmmmm I've just noticed that this is from the same site as the calculator, so maybe the calculator allows for this already?

Anyway reading it again it does still look odd if any calculator gives a result claiming you are better off inside IR35 - I'm prepared to admit I could be wrong on what I said earlier.