Reply to: IR35 and expenses

[tim522004@yahoo.co.uk]

Your not quite getting it!

If you pay PAYE/NI through Joe Bloggs Ltd (which is what you said) then there is no problem with IR35. If the training costs are paid for by Joe Bloggs Ltd then there is no issue unless it is a benefit in kind and it won't be.

IR35 won't be a problem because you have made NO tax/NI savings because Joe Bloggs Ltd has paid you a salary.

It is as simple as that.

However, it would have cost your more money because rather than saving tax/ni via the dividend route in your own company you now have paid the full amount of tax/ni for the sake of getting tax relief on the training costs. Your letting the tax tail wag the dog!

However, if the contract is subject to IR35 anyway then using Joe Bloggs Ltd would be fine (becuase you would have to pay the tax/ni under IR35).

[malvolio]

Perhaps you should invest in some taxation training then...

[expat]

In a word 'NO'.

This scenario was covered. Probably lost in the detail.

If Joe Bloggs pays for your expenses direct and you are an employee this will not be added to your salary. The only reason why something would be added to your salary is if it was a benefit in kind and training isn't.

Thanks. A bit hard to believe though.

I invoice through MyCo, IR35 strikes. You invoice through YourCo, IR35 again.
I invoice through YourCo and you invoice through MyCo, no IR35.

I bet Hector doesn't believe it!

[tim522004@yahoo.co.uk]

Simple Answer!

In a word 'NO'.

This scenario was covered. Probably lost in the detail.

If Joe Bloggs pays for your expenses direct and you are an employee this will not be added to your salary. The only reason why something would be added to your salary is if it was a benefit in kind and training isn't.

[expat]

If you incur any costs as an 'employee' (which would be the EDS scenario) then you can try and claim the cost as cost incurred 'wholly, exclusivley and neccesarily' for the performance of your duties. Having said that if EDS did not reimburse you for the training cost in the first place then the Revenue would have strong argument that the expense did not qualify as an allowable expense under the this rule for schedule E income (ie. salaries).
.....
If Joe Bloggs Ltd pay for your training costs direct then there is a strong argument that you are an employee or IR35 applies and the result of that is self explanatary.

You covered a lot of cases but not I think the one that I was thinking of. More simply:
If instead of me, John Smith, invoicing through my Ltd, Co John Smith Ltd, and getting into arguments about IR35, I get my mate Joe Bloggs to employ me through his Ltd Co Joe Bloggs Ltd.

Then Joe Bloggs Ltd invoices my client, and pays me salary (and pays PAYE & NICs).

So then Joe Bloggs Ltd invests in its future by spending some of that invoiced income on training me, and obviously has to pay me a lower salary as a result of that expenditure.

Joe Bloggs Ltd claims that training cost as a business expense. There is no question of my claiming it, because I never saw that money.

The question is, will that training cost (paid and claimed by Joe Bloggs Ltd, not by me) be added in to my deemed income?


As you said "If Joe Bloggs Ltd pay for your training costs direct then there is a strong argument that you are an employee" - but I'm admitting to being an employee. I'm not trying to claim any expenses: Joe Bloggs Ltd is.

[tim522004@yahoo.co.uk]

It's actually very simple!

If you incur any costs as an 'employee' (which would be the EDS scenario) then you can try and claim the cost as cost incurred 'wholly, exclusivley and neccesarily' for the performance of your duties. Having said that if EDS did not reimburse you for the training cost in the first place then the Revenue would have strong argument that the expense did not qualify as an allowable expense under the this rule for schedule E income (ie. salaries).

If you are an employee of Joe Bloggs then PAYE and NI will be deducted from your salary and IR35 does not apply; mainly because the Revenue have got their money! Then the question of tax relief for training expenses would be the same as the first paragraph.

If you are a contractor/self-employed then Joe Bloggs will pay your invoices and then you will take care of your own costs/taxes. It then becomes a question of does IR35 apply to this contract or not. If yes, then as already mentioned by some other people you will only get the 5% deduction for expenses. If Joe Bloggs Ltd pay for your training costs direct then there is a strong argument that you are an employee or IR35 applies and the result of that is self explanatary.

By the way, if you have an accountant and he/she believes IR35 is applicable to the contract but you don't. And he/she knows you have prepared your returns based on your assumptions he will 'shop you in' to the Revenu on the NCIS website for tax evasion; otherwise he/she could go to jail!
So IR35 isn't quite voluntary if you have an accountant who disagrees with your interpretation of your contracts.

If you try and claim the training expense against another form of income (ie. I think there was a shop income mentioned!) then the expenses has to pass the 'wholly and exclusively' rule. If it was IT training and the income was from a shop then the cost would not pass this test. Having said that the Revenue would have to investigate first and find the cost. If the IT training cost wasn't material then the chances are that it wouldn't be discussed.

In spite of everything above there are other 'clever' ways to get the tax relief for your training costs; but I'm not about to mention them in a public forum!

[expat]

Makes you wonder why you bother, sometimes...

IR35 is on a per contract basis. You could have 99 outside and one inside, all at the same time. Plus, business expenses have to be vaguely related to the business. Now, the answer to your question is...?

OK, less sarcastically, if I run a tat shop and an IR35 IT contract, I can't fund traininf gron the shop. But if I run an IR35-in contract and an IR35-out contract, then the IR35-out funds can pay for my training.

And the real answer is that it doesn't matter because IR35 is voluntary.....

[malvolio]

Makes you wonder why you bother, sometimes...

IR35 is on a per contract basis. You could have 99 outside and one inside, all at the same time. Plus, business expenses have to be vaguely related to the business. Now, the answer to your question is...?

[expat]

Didn't say I agree with it - it's what they are using. Plus I doubt no where near 100% of their income is for services !

Right, so if I earned say 60% of my income from IT and had the IR35 hounds at my heels, but the other 40% from a chav tat shop (which is obviously a Real Business) then the takings from the shop could go on .NET courses and there'd be no problem.

[foritisme]

Didn't say I agree with it - it's what they are using. Plus I doubt no where near 100% of their income is for services !

[expat]

http://www.hmrc.gov.uk/bulletins/tb60.htm


There is a section at the end of this bulletin which explains why Joe Bloggs can't claim for your training expenses. The IR are using this to close down some of the composites (or change the way they operate). There was another thread whereby people working for composites had to change their arrangments if the contract failed IR35.

Right. Thanks. That's quite clear.

So actually if EDS put a bum on a seat for a year, they [the person] "[work] for the client in such a way that they would be regarded as an employee of the client, had they worked for them directly rather than via [EDS]" so legally this would apply to them too, therefore
"[EDS] will have to deduct and account for tax under PAYE and Class 1 National Insurance contributions in respect of that worker on (broadly) all of the money the service company receives from the client in respect of work done for the client by that worker. "

Or in short if EDS put a Bum on a Seat, they can't claim training for the associated brain as an allowable expense.



Or at least not out of their billing.

[foritisme]

Ir35

http://www.hmrc.gov.uk/bulletins/tb60.htm


There is a section at the end of this bulletin which explains why Joe Bloggs can't claim for your training expenses. The IR are using this to close down some of the composites (or change the way they operate). There was another thread whereby people working for composites had to change their arrangments if the contract failed IR35.

[expat]

No. You will be paying PAYE and NICs like any other employee. IR35 doesn't even enter the equation. If Bloggs pay for traning out of their pocket, it's effectively free as far as you're concerned. If Bloggs won't pay for your training, you'll have to do it out of your own taxed income.

I thank you for your replies. But my question still nags: if Bloggs pay for my training, not out of their pocket but out of my client billing before Bloggs pay me salary, is my salary deemed to include that?

[expat]

No. You will be paying PAYE and NICs like any other employee. IR35 doesn't even enter the equation. If Bloggs pay for traning out of their pocket, it's effectively free as far as you're concerned. If Bloggs won't pay for your training, you'll have to do it out of your own taxed income. Either way, you can't reclaim anything.

I'm supposing that you are an employee of Bloggs, with Bloggs invoicing your agency for your services, instead of your being an employee of YourOwnCo Ltd and YourOwnCo Ltd invoicing. And my problem is:

If Bloggs can pay for your training before it pays you your salary (and you not have to pay tax on a deemed salary including that cost), how come your own Ltd Co can't?
But if Bloggs can't, how come EDS can?

[malvolio]

If you are a sole trader, the trading rules are subtly different but IR35 still applies.

You are one of three things - an employee of someone, a business owner or a declared self-employed person under Scehdukle D (who can't work through agencies). If you're in an umbrella, you are an employee. If you are in a composite you're a pretend business owner.

If you are caught for IR35 you pay more tax than if you aren't no matter which flavour of "self employed" you are because of the expenses you can't offset against tax. If you can take dividends you obviously save an extra chunk of NICs which gets you up to the 20% point.