Does Corporation Tax apply to inside IR35 contracts?
It’s fairly complicated, but assuming that you work inside IR35 on one but not all of your contracts in a year, your business will still need to settle its annual Corporation Tax bill, along with quarterly VAT returns, for example. However, given inside IR35 income is deemed a legitimate business expense, it will reduce your Corporation Tax bill. So if all income generated for your business is earned through inside IR35 contracts, in theory, your Corporation Tax should be zero.
HMRC’s explanation of the rules is, as you can imagine, fuzzy to say the least. However, the guidance states:
“When calculating Corporation Tax liability, your intermediary/the fee payer can deduct the amount of the deemed employment payment and any Class 1 employer’s NICs due on it. This deduction is only allowed when you calculate the taxable profits for the accounting period in which the deemed employment payment is treated as paid.”
The same goes for VAT, as HMRC details here:
“The fees charged by your intermediary for providing services will still be subject to VAT, even if the engagement is within the off-payroll working rules. This is because it’s still the intermediary that’s contracting to provide services to its clients and as such the supply remains within the VAT regime.”
As a result of being placed inside IR35 by your client, you’ll be taxed at source by your fee-payer – whether that’s your client or the agency you work through. This means you don’t need to worry about calculating the deemed payment and settling employment taxes (as explained in HMRC’s statement), but unfortunately the same cannot be said about Corporation Tax if you’ve worked both inside and outside IR35 over the course of the year. Should this be the case, you’ll be expected to pay a 19% tax on any profit your company makes in its accounting period from outside IR35 contracts.
However, you will be able to reduce your Corporation Tax bill by maximising legitimate expenses, other than PAYE. While allowable expenses are limited when working inside IR35, it’s worth considering increasing your pension contributions, making the most of professional subscriptions and taking out business insurance, which will all help offset your Corporation Tax.
This answer was provided by IR35 specialist, Qdos Contractor.
If working within IR35, when previously outside:
How can your company now make company contributions to your pension since it will have no income?
How can you make up those contributions yourself.
If my company previously contributed 30K, and I now have to take that as income and pay tax on it, will there not be a shortfall if I contribute whats left of the 30K after I have paid PAYE?
Some umbrella companies do not allow you to contribute more than a small percentage of your income to pension … how can you overcome this major impact on your pension contributions?
Warren – excellent questions, yes you will be worse off (but you knew that!). My guess is that you should make your payments into a Personal Pension but I would consult an expert (ohh…. this is new legislation so there are no experts). If it parallels the genuinely employed situation you make the payments after tax and NI and then the tax (but not the NI) gets added back on (HMRC pay the pension provider directly).
I can’t see there would be anything preventing your company making further pension contributions, although these would be from retained profits.
Some umbrella companies offer pension schemes (in theory, they all should), although they are more coy on what basis and with whom. Ideally, you want an umbrella company that offers Salary Sacrifice pension contributions (to accommodate pension contributions before Employee & Employer NI), otherwise you will have exactly the same tax benefits as if you made contributions through a personal pension (and you would have more control over the provider / scheme if you were paying into a personal pension plan).
You would need to be careful if you were making contributions both from your own company and through an umbrella company (grossing up?) to ensure you do not exceed the annual limit.
This isn’t just about who makes the determination of IR35 status and who sends money to the taxman. Under the old rules if you were inside IR35 your limited company was still allowed something for running costs. Professional insurances and accountancy fees would come out of that.
Now it seems there is nothing for running costs so are you supposed to pay these insurances out of taxed and Ni deducted income? or does the purported employer loose the right to sue you?
Would another option be to simply take all the income, from an inside IR35 role, directly as personal income to your personal bank account? So working through an Intermediary paying via an umbrella company a net salary into your personal bank account. No money going into your Ltd Company?
Also, if the umbrella company is well setup they would be able to pay pension contributions before tax & NI – if this was as Salary Sacrifice employer contributions then deducted before all tax & NI.
I wholeheartedly agree with you. I cannot see that there would be much point in paying income that has already been fully taxed at source as PAYE into a company account. Much better to leave the company account for engagements outside IR35, and take personally any fees earned within IR35 (i.e. effectively a waged employee) like any other employee – as the article hints at, HMRC have no real interest, nor any expertise in company law, in what happens after PAYE has been collected.
If the client I work for deems me to be inside IR35 and starts to tax me accordingly and takes NIC and paye before paying the remainder of my invoice….how do I account for my legitimate expenses? The client doesn’t know what I pay my accountant, or my business mileage or my phone, or my PPE costs, my pension, insurance etc…so do I put in a claim for a rebate at the end of the year for all of my expenses? Do I do it monthly/quarterly? Do I submit it to the client along with my invoice? Thanks in advance?
I need to make a decision on going Deemed Employee or PAYE under an Umbrella. I prefer the Deemed Employee route as I do have a few other business interests that do generate a small amount of other revenue. My accountant has told me that if I go the Deemed Employee route then I will pay Corp Tax on the income from the IR35 engagement, so it’s good that you’re article confirms that is not the case. The other 2 questions which no one can answer is, 1: How do you get the money out of the ltd Co – do you need to take a dividend and then pay further tax/NI. 2: As the Umbrella Co only charge BR at 20%, is any difference then managed under self-assessment at the end of the tax year? I’ve also been told that the VAT is paid on the gross amount (i.e. your day rate less the Emp NIC and Apprentice Levy). Not sure Quickbooks will like that in the VAT 100 form as the percentage will be wrong.