If you provide your personal services to a client through either a limited company or partnership then you may be liable to an IR35 charge. Each contract should be reviewed individually to see whether IR35 applies and this will depend on whether the worker is really independent or an employee.
The basic rule in deciding whether IR35 is applicable is whether an individual would be considered an employee of the client had it not been for the existence of the personal service company or partnership.
If the client pays you by the hour, week, month, etc and tells you what to do, where to do it and how to do the work then you are likely to be considered an employee.
If however you have to provide equipment, tools or materials, can make a loss on the contract, have other people to do the work or have to put right any unsatisfactory work at your own expense then it is unlikely that you will be caught by IR35.
If IR does apply then there will be an additional tax charge will be payable based upon the IR35 “deemed payment”. This “deemed payment” is not paid, it is merely a calculation to assess the additional tax. Below is an example of how this may be calculated.
| 1 | Total of all income and benefits from contracts subject to IR35
Less 5% for unspecified expenses |
£40,000
(£2,000) |
| £38,000 | ||
| 2 | Add any other payments or benefits | – |
| 3 | Deduct any expenses actually paid for by the worker which would have been tax deductible had they been an employee |
(£3,000) |
| £35,000 | ||
| 4 | Deduct capital allowances on any equipment paid for by the worker personally |
– |
| £35,000 | ||
| 5 | Deduct any pension scheme contributions | (£2,000) |
| £33,000 | ||
| 6 | Deduct Class 1 or Class 1A national insurance paid by the company on salary and benefits | (£867) |
| £32,133 | ||
| 7 | Deduct any salary or benefits paid by the company that have already been taxed as employment income | (£10,000)
(£2,000) |
| £20,133 | ||
| 8 | Multiply by 100 / 113.8 to find
DEEMED PAYMENT |
£17,692 |
| Employer Class 1 national insurance payable on deemed payment at 13.8% |
£2,441.50 |
Given the potential additional tax liability payable it is important that anyone operating through a personal service company or partnership should have their contracts and working practices externally reviewed to see whether they could be caught by the IR35 legislation.
If you think that this may apply to you, then contact us as we work with Taxwise who can provide impartial contract reviews at a reasonable price.