With the new IR35 reform being rolled out from 6th April 2020, some contractors are being told that working outside IR35 on their contract is no longer an option. We explored the different options that you may be offered in a previous blog, but let’s take a closer look at how it works if you are deemed to be insideIR35 by your client.
The first thing to note is that there is an element of risk if you decide to take an inside IR35, permanent, or umbrella contract with your existing client. This is because, if you move directly from an outside IR35contract to an inside IR35/permanent/umbrella contract with the same client, HMRC may deem that you were in fact inside IR35 all along and as a result, may launch a retrospective tax investigation, which, if HMRC are successful in their challenge, could result in you being liable for back taxes and penalties.
In HMRC’s IR35 factsheet for contractors, they state that they “will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour” but there is no guarantee that this will stop them launching an investigation, so you will need to consider this risk carefully.
So, how will operating an inside IR35 contract work?
The main differences between working on an inside IR35 contract to an outside IR35 contract are:
You will not be able to claim any business expenses related to your inside IR35 contract through your limited company. If you have retained profit in your company from a previous, outside IR35 contract, then
you will still be able to put through expenses related to the running of the company (accountancy fees, pension contributions etc), but day to day expenses related to the new contract cannot be claimed.
The fee payer (whether it be your client, or an agency) will be responsible for deducting PAYE from the worker’s gross pay (and then paying this over to HMRC). They will need to deduct income tax, employees
national insurance and employers national insurance (although may fee payers are paying the employers NI themselves, rather than deducting it from the worker’s fee).
Provided there is no other income coming into the limited company (for example, from additional outside IR35 work, or VAT flat rate scheme savings), there will be no corporation tax due, as all income is treated
as deemed salary.
If the company is VAT registered, VAT will still need to be charged on your fee, and then paid over to HMRC as usual.
As stated above, all income coming into the company will be treated as deemed salary, with tax and NI already paid. You can therefore withdraw it from the company with no further tax implications, but RTI
submissions will still need to be made to declare the withdrawals.
If there is existing retained profit in the company from a previous outside IR35 contract, you are still able to withdraw this as dividend(s) and these will be taxed based on your relevant tax rate.
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