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.