Reply to: Steps for volunterily moving to 'Inside' IR35

[Bluebird]

The biggest change for me I think is that if I have a contract deemed inside - then all income go through me, whereas at the moment as my wife doesn't work I can utilise her tax allowances.

I currently take all the money ( apart from tax obviously ) out of the company each month via salary, dividends, a small amount of expenses and a workplace pension.

[daemon]

I'll play devil's advocate for a while.

If I was HMRC and I saw that level of expense - every month - I'd send you a letter along the lines of:

"It seems to me that you are travelling to and from a place of work, rather than travelling in the performance of your work. Would you like to explain why that is incorrect?"

Clearly if I was HMRC, I'd be couching that as:

"You are clearly travelling to and from work which is not a deductible expense. I will raise an assessment on you to reflect this decision, along with penalties. You can save yourself the time and expense of an enquiry by just agreeing with me."

In all seriousness however, you need to be building a deep and continuous audit trail of why you are travelling FOR work, rather than TO work.

You would then point them to what is tax deductable by their own rules - which is travel from your office / home office to where the client requires you to be.

[daemon]

I understand the need for hyperbole in a short response, but this is just not accurate.

The difference between expenses for employees/self employed is minimal these days.

An employee earning £100k pays around £34k in tax and NIC. His employer pays another £12,880 in employer NIC. If the employer is a company they "save" CT of £112,880 x 18% = £20,318.

Net to HMRC is £34k + £12,880 less £20,318 = £26,562.

Net to employee is £66,000.

That same contractor who earns £100,000 for his company has a different take.

He may take a salary of say £12k, (more or less equal to PA). He would pay £500 NIC.

His company has a profit of £100,000 less £12,500 = £87,500.

CT is due of £15,750.

The company can distribute £87500 - £15,750 = £71,750.

As a div he pays 7.5% on say £35,000 and 32.1% on £36,750 = £14,420 (ish)

he has net money £71,750 - £14,420 + £11,500 = £68,830.

(I'm managed to forget the employer NIC on the £12k salary but it will not make much difference)

This assumes that all the money is removed from the company in a year. It is possible that this will not happen and the money will stay. Eventually however the money will leave and it will be taxed.

(Unless a whizzy tax scheme comes along).

However that doesnt factor in that you WILL pay Employers National insurance @ 13.8% and Apprenticeship levy @ 0.5% out of your day rate and also fees to an umbrella company if you're inside IR35.

The employee will also get holiday pay and sick pay, an inside IR35 "employee" wont.

Holiday pay when you're inside IR35 will be funded by holding back 1/11th of your day rate to fund your annual leave entitlement and you'll only get statutory sick pay.

On top of that, a lot of contractors dont just contract in their local area, and all travel expenses then are from your net pay, not gross which can be significant. Nor can you reclaim VAT on expenses, etc

[DolanContractorGroup]

I had that, using a brolly and keeping my Ltd on ice in case needed for further outside IR35 contracts.

The brolly was around £100/month in fees but charged only when invoices were raised, so between contracts there are no ongoing charges. This may vary by brolly and how they operate.

The Ltd incurs operating costs from accountancy fees (minimum of yearly accounts submission), Companies House annual filing fees (for confirmation statement on state of the company in terms of directors/shareholders) even if dormant (officially not actively trading) alongside active trading costs, which for me came to a minimum of around £500/year even when not using the Ltd for contracting while using the brolly for inside IR35 contracts.

Contractor Umbrella. Found after reading up on brollies and recommendations via the dedicated sub forum

Thanks Hobosapien.

To continue on from this, we now offer free use of the Contractor Umbrella service if you are a Ltd co. client of Dolan Accountancy. You will continue to pay the £95 monthly fee for the accountancy services, but there will be no margin deducted for any contracts you undertake through umbrella employment.

This is handy for those of you that have some contracts outside-IR35, and some inside-IR35. The 'outside' ones can continue to be dealt with by our accountancy side, and you could use our umbrella for the 'inside' contracts.

Kind regards


Zeeshan

[vwdan]

No, the key is not the 24 month rule.

It has always been the case that travel to and from work is non deductible and if reimbursed, taxable.

Travel in the course of work is deductible and not taxable if reimbursed.

The issue has always been that HMRC has not had the manpower to police this.

PERMANENT place of work. And that has a definition. Even HMRC's own examples don't support your view - this isn't contentious.

https://assets.publishing.service.go..._employers.pdf

A place is a temporary workplace if an employee goes there only to perform a task of
limited duration or for a temporary purpose even where the employee attends it regularly

Where an employee attends a workplace for a limited period of time to do a particular
task or project then the workplace will be a temporary workplace, even where the
employee’s attendance is regular. This is on the basis that they’re attending for the
purpose of performing a task of limited duration. Go to paragraph 3.18 and the
24-month rule.

Justin is employed on a major bridge construction project. To begin with he works on the
north shore but he is then transferred to work on the south shore. Crossing the river is
inconvenient (which is why a new bridge is needed), and it takes Justin longer to travel to
the south shore and costs much more than it did to travel to the north shore. The north
and south shores could be described as a single construction site and, as the crow flies,
they’re not far apart. However, Justin’s move from the north to the south shore has had a
significant effect on his journey to work (and, in particular, the cost of that journey) so his
workplace has changed for tax purposes.

How is that not travelling TO work by your definition?

And a clear contractor example exception, where the 24 month rule is key:

Catherine, a computer consultant, is the only employee of a company which she controls.
She is a specialist in banking systems.
She spends 18 months working full-time at the headquarters of a merchant bank in
Lombard Street in the City of London. She then moves next door to design a new
computer system for a different bank where she expects to stay working full-time for
22 months.
After that assignment she moves to work at a bank close by on Cheapside for 17 months.
Catherine is not entitled to tax relief for her travel from home to these workplaces,
because the nature of her work is such that she expects to work continuously in the
‘Square Mile’ albeit on the premises of different banks. So her travel from home to work
will be broadly the same every day, year in year out

[cojak]

No, the key is not the 24 month rule.

It has always been the case that travel to and from work is non deductible and if reimbursed, taxable.

Travel in the course of work is deductible and not taxable if reimbursed.

The issue has always been that HMRC has not had the manpower to police this.

This is where WFH home will help the assessment. If you do WFH for a portion of the time within a contract, to shows that travelling to various offices is travelling FOR work.

[webberg]

I can't believe nobody has picked up on this - firstly, travel and subsistence are pretty well understood rules nowadays, with the 24 month rule being the key. Secondly, lots of permie consultants will also rack up considerable expenses over those time periods. In fact, it was this, as a permie consultant that got me forced into self assessment due to the P11D reports.

No, the key is not the 24 month rule.

It has always been the case that travel to and from work is non deductible and if reimbursed, taxable.

Travel in the course of work is deductible and not taxable if reimbursed.

The issue has always been that HMRC has not had the manpower to police this.

[vwdan]

I'll play devil's advocate for a while.

If I was HMRC and I saw that level of expense - every month - I'd send you a letter along the lines of:

"It seems to me that you are travelling to and from a place of work, rather than travelling in the performance of your work. Would you like to explain why that is incorrect?"

Clearly if I was HMRC, I'd be couching that as:

"You are clearly travelling to and from work which is not a deductible expense. I will raise an assessment on you to reflect this decision, along with penalties. You can save yourself the time and expense of an enquiry by just agreeing with me."

In all seriousness however, you need to be building a deep and continuous audit trail of why you are travelling FOR work, rather than TO work.

I can't believe nobody has picked up on this - firstly, travel and subsistence are pretty well understood rules nowadays, with the 24 month rule being the key. Secondly, lots of permie consultants will also rack up considerable expenses over those time periods. In fact, it was this, as a permie consultant that got me forced into self assessment due to the P11D reports.

[Hobosapien]

I'd be interested to know who your brolly is please as they sound like they would suit me?

Contractor Umbrella. Found after reading up on brollies and recommendations via the dedicated sub forum

[pauldee]

The brolly was around £100/month in fees but charged only when invoices were raised, so between contracts there are no ongoing charges. This may vary by brolly and how they operate.

I'd be interested to know who your brolly is please as they sound like they would suit me?

The big game changer from outside to inside IR35 contracts is that inside ones mean you can't claim travel and accommodation expenses, which makes a lot of marginal rate away from home contracts not worth doing.

Luckily I live in a big city where almost all of my contracts are on my doorstep.

[Hobosapien]

Right, so that's not a lot of money in the general scheme of things. And if you're paying PAYE on a decent day rate, then even combined with the umbrella company costs, you'll still be bringing home considerably more than an equivalent permie job.

So it begs the question: what's all the panic about? Why are we talking about the end of contracting?

The big game changer from outside to inside IR35 contracts is that inside ones mean you can't claim travel and accommodation expenses, which makes a lot of marginal rate away from home contracts not worth doing.

So while I'm happy to do inside IR35 contracts (via a brolly that offers decent salary sacrifice provisions to claw back some of that additional tax) I'll only consider remote ones if the rate suits the situation.

[Hobosapien]

My assumption was that an umbrella would be more expensive than running a PSC. How much does an Umbrella cost on average?

I can see myself getting into the situation where I have to keep the PSC running in case I get an outside IR35 role in the future, an umbrella would be and extra overhead.

I had that, using a brolly and keeping my Ltd on ice in case needed for further outside IR35 contracts.

The brolly was around £100/month in fees but charged only when invoices were raised, so between contracts there are no ongoing charges. This may vary by brolly and how they operate.

The Ltd incurs operating costs from accountancy fees (minimum of yearly accounts submission), Companies House annual filing fees (for confirmation statement on state of the company in terms of directors/shareholders) even if dormant (officially not actively trading) alongside active trading costs, which for me came to a minimum of around £500/year even when not using the Ltd for contracting while using the brolly for inside IR35 contracts.

[Hobosapien]

Why was my example "terrible"?

I ask in a genuine attempt to make it better, more realistic.

I confess that I'm struggling with a model that says the PSC earns money that the individual does not need immediately but rather assumes that the following year there is no income, thus freeing up more PA/basic rate bands.

I'm not sure how realistic that is.

My model assumed that the contractor is working pretty much continuously without long breaks.

If that assumption is wrong, then I'm happy to amend.

The scenario I described and worked to for a good few years prior to 2016 divi tax changes did mean that a 'warchest' was built up inside the company, either through profit not yet declared as dividend for withdrawal or a dividend declared but left in the company during uncertain periods of contracting where I wanted to make sure there were no cash flow issues so left some in as a buffer.

Whether the approach is/was suitable depends how much the contractor needs to draw each tax year to live. If operating to a cheaper lifestyle there's more flexibility in how to take the profit out of the Ltd to put to personal use.

This is how some are looking to close a company with lots of retained profit, so looking for Entrepreneurs Relief or some other tax advantage way than just drawing a massive divi that blows through the higher tax brackets.

[webberg]

Right, so that's not a lot of money in the general scheme of things. And if you're paying PAYE on a decent day rate, then even combined with the umbrella company costs, you'll still be bringing home considerably more than an equivalent permie job.

So it begs the question: what's all the panic about? Why are we talking about the end of contracting?

The real kicker I think comes in NIC.

A client employing somebody on £80,000 a year (£350 a day equiv rate for this example), actually pays around £90,000 out of funds because of NIC.

If that client pays a day rate of £350, then presently you pay NIC but at a much lower rate assuming that you are savvy with divs etc.

Post April, if you are inside, then NIC (in this example £10k) is due.

If your £350 a day is paid to an umbrella, they will deduct NIC (around £8500 due to netting down) and you will receive £350, less tax, less em'ee NIC, less em'er NIC as above.

In effect a hit of £8,500 at least.

You could therefore go to the client and say that your day rate needs to increase to compensate.

Whether you are successful or not can depend on many factors.

[webberg]

Agree!!! His example was terrible and pretty sure 99% of contractors with ltd won't do anything close to that!

Why was my example "terrible"?

I ask in a genuine attempt to make it better, more realistic.

I confess that I'm struggling with a model that says the PSC earns money that the individual does not need immediately but rather assumes that the following year there is no income, thus freeing up more PA/basic rate bands.

I'm not sure how realistic that is.

My model assumed that the contractor is working pretty much continuously without long breaks.

If that assumption is wrong, then I'm happy to amend.