Ir35

SkodiRS · 16-08-2006, 16:19

Can someone please explain IR35 to me...and make it simple...if possible.

Many thanks.

ItsOnlyMe_vRS · 16-08-2006, 16:35

Sorry mate, there is no simple with IR35

What are your worries/questions

***ncarring*** · 16-08-2006, 16:48

Simply put, the IR decide whether to treat you as an employee or a contractor based on a number of variable criteria that include whether you work for more than one client, how long you spend working for that one client, the way the wind is blowing, and basically how much attention you attract to yourself.

If they decide you are effectively an employee of a single client, they will then force you to declare ALL your income as earnings, rather than allowing you to leave some money in your company accounts and pay yourself dividends from it. This can be a big tax burden and in some cases leads to people having huge debts because they can apply this decision retrospectively back to the time you started this period of "employment". You will also find that your business expenses get reassessed as you won't be able to claim you're working for your company on a remote client's site and claim mileage, for example.

The Professional Contractors Group (http://www.pcg.org.uk) are the experts in this, and if you join up (about £140/year) will extend their legal services to you should you become involved in an IR35 case. There's a wealth of material on their website which may help.

neelyp · 16-08-2006, 16:55

An umbrella company like Brooksons give good advice. They will only allow you to use them if they deem you a watertight case.http://www.brookson.co.uk

JPreston · 16-08-2006, 17:50

It's not so complicated, speaking as a chartered accountant who has spent the last couple of months looking specifically into this as I'm about to start contracting myself

If you think you will be caught by IR35 then you probably will - HMRC have helpfully put their staff manual up on their site so that is the best (free) resource, it has decision trees and flowchart etc. Go and see an accountant for a half hour consultation, let them know your specifics and they will be able to tell you what you can get away with (in practice it seems that while you should strictly account for contracts inside and outside IR35 separately and only pay dividends out of the outside ones, people seem to get away with a certain level of dividends as long as you take a commercially defensible salary). If they tell you that they can't do anything for you, you don't have to take them on.

SkodiRS · 16-08-2006, 18:49

Many thanks for everyones replies....scenario is this....

....got my first contractor role so I'm looking into everything related to it.

I sort of understand the part of IR35 where it related to whether your were deemed to essentially be employeed by a client but, didn't know how this effected you.

Expanding upon this at what point would you be deemed the HMRC to be employeed by a client i.e if you contracted to a particular client for more than a certain number of months? Or is there more to it?

Thanks again for helping out.

Been looking at the PCG site this afternoon but was still a little confused hence my post.

Looks like I may well set-up my own company tomorrow and a business Bank account. I don't think I need to worry about an accountant yet though?

Can anyone recommend one in Hampshire per chance?

JPreston · 16-08-2006, 19:11

If you work for more than 24 months you are definitely stuffed as this is the guideline, but there is much more to it than this....do you have to sign in as a visitor each day, do you provide your own tools, can you send a substitute or must you perfom the work yourself, are you told what hours you should work, do you get paid according to time spent or work done, do you have to make up for defective work at your own cost and many more. You have to be able to truthfully answer yes to substantially all of these to in order to pay yourself a dividend (and so save employers NI, employees NI and income tax).

If you are starting you're own ltd company you don't *need* a business bank account - or indeed any bank account - and since they are more expensive you may like to give these a miss. But you definitely should speak to an accountant first thing, you will need to establish your own PAYE scheme, register for VAT (probably) and file all sorts of forms and if you start missing your statutory deadlines it gets very expensive.

An accountant will more than pay for himself in saved tax unless you are caught by IR35...which you probably are...in which case a Ltd company is not the best vehicle for your contracting anyway!

SkodiRS · 16-08-2006, 19:25

Quote:

Originally Posted by JPreston

An accountant will more than pay for himself in saved tax unless you are caught by IR35...which you probably are...in which case a Ltd company is not the best vehicle for your contracting anyway!

So I should get an accountant to check my contract first of all right?

There seems to be a lot to do and I don't have that much time to look into it all. I may use an Umbrella company to begin with and take my time to look into setting up a Ltd company.

I've been told that setting up a Ltd company is more tax efficient and you obviously don't have to paya fees to another organisation...apart from an Accountant. If this right?

devonutopia · 16-08-2006, 19:49

How much work is going to be based like this though. Speaking from experience of doing a recent ltd company, the amount of work needed to be done by law, even on a dormant ltd company is phenominal. Ful analysis of bank, disclosures/checklists, various regulations like FRSSE 2005, etc. All a bit daunting. Compared to a similar small sole trader / self eomployed person doing an Income and Expenditure account... Accountancy fees will be minimal if the work is simple and records are clear when it comes to producing a year end I&E account.

BTW, I've only been training about 4 months so speak from a limited accountancy background.

**robmawer** · 16-08-2006, 20:03

Quote:

Originally Posted by SkodiRS

I've been told that setting up a Ltd company is more tax efficient and you obviously don't have to paya fees to another organisation...apart from an Accountant. If this right?

Can be...depends a lot on how you run things...speak to an accountant from the start, they'll be able to advise you on the best way to run your business...

Rob.

***ncarring*** · 16-08-2006, 20:27

If you join PCG they have framework contracts you can use as a template. As JPreston said, a key indicator is if you get paid for results, or just for time. If it's based on time, you're more likely to be seen just as an employee. Substitution is a difficult one for one-man companies but it means can you send another employee to do the same job - adds weight to the idea that the contract is a business-to-business relationship rather than a employer-employee one.

I can show you an example of a contract if you're interested, based on distinct projects with specific amounts of effort against them that were all signed up individually, and could equally be cancelled individually.

If you start a Ltd company you will almost certainly need an accountant as you will have to prepare annual returns and accounts for Companies' House.

@Jason - the work done for a dormant company like mine is minimal - my accountant is now reaping the rewards for the hard work he had to do while I was active - VAT returns etc.

You have to be registered for VAT if your turnover exceeds 60k per annum, and that means a quarterly VAT return, which is another job much better left to those who know what they're doing. Likewise if you form a company you have to register for PAYE, and complete proper returns to the IR including P60 at the end of the year, etc.

devonutopia · 16-08-2006, 20:28

I would say, it takes me a typical hour or so (depending on how records are kept) to do an I&E account, even for someone who earns upwards of £100k p.a on a self employed basis.

Things get a little complicated when there's a proper business involved and a proper set of accounts needs doing, dealing with fixed assets, depreciation, stock, bank balancing, etc - and then limited company is the next step on from that.

Nick. Its £61k since April. I only know because I had one non-vat reg'd person who we thought was trying to falsely show their income below this threshold to avoid this situation. naughty naughty.

Oh, and being self employed means you might be able to claim things like a 40p mileage rate for business use (up to 10k ish I think) and things like use of home @ £5 a week (at discretion). Lots of little "expenses" to minimise that profit subject to 19%.

tinkerbell · 16-08-2006, 21:49

Quote:

Originally Posted by devonutopia

Oh, and being self employed means you might be able to claim things like a 40p mileage rate for business use (up to 10k ish I think) and things like use of home @ £5 a week (at discretion). Lots of little "expenses" to minimise that profit subject to 19%.

You can claim mileage as an employed person too, even through your own company as long as the company does not own the vehicle. Yes it is 40p for the first 10,000 miles and then 25p thereafter per tax year.

I'm assuming you haven't done any tax then yet Jason?

I didn't know a self employed person could pay tax at 19%

I thought that was for Ltd companies?

Is everyone asleep yet?

devonutopia · 16-08-2006, 21:57

Well, all I know is that the excess of income over expenditure is subject to 19% tax. i.e on the "profit".

This is effectively corporation tax.

**robmawer** · 16-08-2006, 22:33

Quote:

Originally Posted by devonutopia

Well, all I know is that the excess of income over expenditure is subject to 19% tax. i.e on the "profit".

This is effectively corporation tax.

I thought when self-employed, the money goes directly to you - you then deduct from this income any expenses/anything you can get away with (

), and then on what's left you pay Income Tax (at 10/22/40%) and Class 2 NI.
Whereas as a Ltd, all the income goes into the company...from this is deducted expenses/anything that can be got away with, a salary goes to each employee (which they then pay Income Tax (at 10/22/40%) and NI on). On the remainder (the corporation's profit) you're then liable for corporation tax (19%/"marginal rate"/30%).

Or have I got the wrong end of the stick?

Rob.

SkodiRS · 16-08-2006, 22:46

Yours sounds right Rob...and I don't even know.

For those of you with Ltd companies....is your Spouse/partner listed as the company Secretary and is the company then deemed a "Husband and Wife" company?

J:

nice piece of information that £61k threshold.

**robmawer** · 16-08-2006, 22:56

Quote:

Originally Posted by SkodiRS

For those of you with Ltd companies....is your Spouse/partner listed as the company Secretary and is the company then deemed a "Husband and Wife" company?

On one of them, mate is Managing Director, I'm a Director, my missus is Company Secretary - not a "Husband and Wife" business.
Of the other, missus is MD, I'm a director and company secretary - I've been advised that this would be regarded as a "husband and wife" company if either one of us would fall under IR35. Seeing as it is a literal husband and wife company I think we'd be hard pushed to debate otherwise...although the original ruling on it was to close the loophole of people using their partner's tax allowances to minimise tax liability on income.

Rob.

devonutopia · 16-08-2006, 22:59

Limited Companies you have shares, and memorandums and articles of association drawn up etc. Basically you could have a 75% / 25% split in favour of you, say 3 shares at £1 for you, 1 share for the wifey.

Would make you the controlling party then, but the wife would be a shareholder and have a voting right. The wife would make the sensible choice for company secretary, but there's nothing stopping you being a director and secretary, and her being a director as well - In fact she needn't be either. Just make sure Companies House know who is what though as an essential part of doing Ltd co. accounts is downloading this info and confirming it.

tinkerbell · 16-08-2006, 23:02

Quote:

Originally Posted by robmawer

I thought when self-employed, the money goes directly to you - you then deduct from this income any expenses/anything you can get away with (

), and then on what's left you pay Income Tax (at 10/22/40%) and Class 2 NI.

You pay Class 2 NIC (£2.10 per week) and Class 4 NIC, based upon assessable profit when self employed plus Income Tax as you have rightly stated.

Quote:

Originally Posted by Skodirs

For those of you with Ltd companies....is your Spouse/partner listed as the company Secretary and is the company then deemed a "Husband and Wife" company?

Do as I do and get your Accountant to act as your company secretary

or if they won't (they aren't all as nice as me

) then you can always pay for this service via one of the company formation agents; I know people who use A1 Company Services or Waterlow for this reason

SkodiRS · 16-08-2006, 23:07

Quote:

Originally Posted by tinkerbell

Do as I do and get your Accountant to act as your company secretary

or if they won't (they aren't all as nice as me

) then you can always pay for this service via one of the company formation agents; I know people who use A1 Company Services or Waterlow for this reason

Ah...but surely then I would have to pay said Accountant for that service as opposed to SWMBO, who would also be paid but it all comes back to the family...if you know what I mean.

tinkerbell · 16-08-2006, 23:08

Quote:

Originally Posted by devonutopia

Limited Companies you have shares, and memorandums and articles of association drawn up etc. Basically you could have a 75% / 25% split in favour of you, say 3 shares at £1 for you, 1 share for the wifey.

Would make you the controlling party then, but the wife would be a shareholder and have a voting right. The wife would make the sensible choice for company secretary, but there's nothing stopping you being a director and secretary, and her being a director as well - In fact she needn't be either. Just make sure Companies House know who is what though as an essential part of doing Ltd co. accounts is downloading this info and confirming it.

You'll start talking about different classes of shares soon and telling him he'll fall into audit next

Not wishing to be rude, but the senior partner from my old firm always used to tell new trainee's that a little knowledge is a dangerous thing

- you need to look at the whole picture, not just a snippet of it

tinkerbell · 16-08-2006, 23:11

Quote:

Originally Posted by SkodiRS

Ah...but surely then I would have to pay said Accountant for that service as opposed to SWMBO, who would also be paid but it all comes back to the family...if you know what I mean.

But being the nice fairy accountant that I am, I don't charge for the use of my name

Edit: I know that A1 charged £235 for acting as director and secretary for a year in 2005. Which is a tax deductible expense too

**robmawer** · 16-08-2006, 23:18

Quote:

Originally Posted by SkodiRS

Ah...but surely then I would have to pay said Accountant for that service as opposed to SWMBO, who would also be paid but it all comes back to the family...if you know what I mean.

The Company Secretary has several legal obligations - one of which is making sure the right documents are submitted correctly and at the appropriate times to Companies House...so paying an accountant a bit extra might not be a bad thing. You can then still employ SWMBO to do book-keeping and the like - if she does this well, it minimises the amount of time (ie. money

) which your accountant will spend in sorting your accounts.
Of course, this will have certain implications for IR35, as this is pretty much the model case "husband and wife" company...

Rob.

devonutopia · 16-08-2006, 23:23

Quote:

Originally Posted by tinkerbell

You'll start talking about different classes of shares soon and telling him he'll fall into audit next

Not wishing to be rude, but the senior partner from my old firm always used to tell new trainee's that a little knowledge is a dangerous thing

- you need to look at the whole picture, not just a snippet of it

Nope, not done different shares and audit yet.

In three years time I expect to be fully enlightened, but until that time, the snippets I have seen and actually absorbed (which is the more amazing thing....

) will come out.

One of my places senior partners came back from italy today. First words "Who wants a beer!?"

I love working there.

16-08-2006, 16:19	#1
SkodiRS BRISKODA Staff Join Date: Oct 2002 Location: darkest Hampshire Posts: 8,650 Members Car: Thanks: 0 Thanked 17 Times in 13 Posts	Ir35 Can someone please explain IR35 to me...and make it simple...if possible. Many thanks. __________________ Adrian.

16-08-2006, 16:35	#2
ItsOnlyMe_vRS Briskodian Join Date: Sep 2005 Location: Berkshire Posts: 316 Members Car: Thanks: 1 Thanked 2 Times in 2 Posts	Re: Ir35 Sorry mate, there is no simple with IR35 What are your worries/questions

16-08-2006, 16:48	#3
*ncarring* Don't talk, drive! Join Date: Feb 2003 Location: The B roads of Britain Posts: 12,953 Members Car: 1983 Porsche 928S / 1972 MGB GT Thanks: 16 Thanked 94 Times in 77 Posts	Re: Ir35 Simply put, the IR decide whether to treat you as an employee or a contractor based on a number of variable criteria that include whether you work for more than one client, how long you spend working for that one client, the way the wind is blowing, and basically how much attention you attract to yourself. If they decide you are effectively an employee of a single client, they will then force you to declare ALL your income as earnings, rather than allowing you to leave some money in your company accounts and pay yourself dividends from it. This can be a big tax burden and in some cases leads to people having huge debts because they can apply this decision retrospectively back to the time you started this period of "employment". You will also find that your business expenses get reassessed as you won't be able to claim you're working for your company on a remote client's site and claim mileage, for example. The Professional Contractors Group (http://www.pcg.org.uk) are the experts in this, and if you join up (about £140/year) will extend their legal services to you should you become involved in an IR35 case. There's a wealth of material on their website which may help. __________________ Nick North Wiltshire RoADAR Last edited by ncarring; 16-08-2006 at 16:50.

16-08-2006, 16:55	#4
neelyp Briskodian Join Date: Jun 2005 Location: Falkirk Posts: 394 Members Car: Octavia vRS, black Thanks: 2 Thanked 3 Times in 3 Posts	Re: Ir35 An umbrella company like Brooksons give good advice. They will only allow you to use them if they deem you a watertight case.http://www.brookson.co.uk __________________ As I slide down life's bannister You are the splinter in my scrotum

16-08-2006, 17:50	#5
JPreston Briskodian Join Date: Oct 2003 Location: Hertfordshi-yer Posts: 944 Members Car: Octavia vRS Thanks: 0 Thanked 0 Times in 0 Posts	Re: Ir35 It's not so complicated, speaking as a chartered accountant who has spent the last couple of months looking specifically into this as I'm about to start contracting myself If you think you will be caught by IR35 then you probably will - HMRC have helpfully put their staff manual up on their site so that is the best (free) resource, it has decision trees and flowchart etc. Go and see an accountant for a half hour consultation, let them know your specifics and they will be able to tell you what you can get away with (in practice it seems that while you should strictly account for contracts inside and outside IR35 separately and only pay dividends out of the outside ones, people seem to get away with a certain level of dividends as long as you take a commercially defensible salary). If they tell you that they can't do anything for you, you don't have to take them on.

16-08-2006, 18:49	#6
SkodiRS BRISKODA Staff Join Date: Oct 2002 Location: darkest Hampshire Posts: 8,650 Members Car: Thanks: 0 Thanked 17 Times in 13 Posts	Re: Ir35 Many thanks for everyones replies....scenario is this.... ....got my first contractor role so I'm looking into everything related to it. I sort of understand the part of IR35 where it related to whether your were deemed to essentially be employeed by a client but, didn't know how this effected you. Expanding upon this at what point would you be deemed the HMRC to be employeed by a client i.e if you contracted to a particular client for more than a certain number of months? Or is there more to it? Thanks again for helping out. Been looking at the PCG site this afternoon but was still a little confused hence my post. Looks like I may well set-up my own company tomorrow and a business Bank account. I don't think I need to worry about an accountant yet though? Can anyone recommend one in Hampshire per chance? __________________ Adrian.

16-08-2006, 19:11	#7
JPreston Briskodian Join Date: Oct 2003 Location: Hertfordshi-yer Posts: 944 Members Car: Octavia vRS Thanks: 0 Thanked 0 Times in 0 Posts	Re: Ir35 If you work for more than 24 months you are definitely stuffed as this is the guideline, but there is much more to it than this....do you have to sign in as a visitor each day, do you provide your own tools, can you send a substitute or must you perfom the work yourself, are you told what hours you should work, do you get paid according to time spent or work done, do you have to make up for defective work at your own cost and many more. You have to be able to truthfully answer yes to substantially all of these to in order to pay yourself a dividend (and so save employers NI, employees NI and income tax). If you are starting you're own ltd company you don't need a business bank account - or indeed any bank account - and since they are more expensive you may like to give these a miss. But you definitely should speak to an accountant first thing, you will need to establish your own PAYE scheme, register for VAT (probably) and file all sorts of forms and if you start missing your statutory deadlines it gets very expensive. An accountant will more than pay for himself in saved tax unless you are caught by IR35...which you probably are...in which case a Ltd company is not the best vehicle for your contracting anyway!

16-08-2006, 19:49	#9
devonutopia Mongreller Join Date: Apr 2003 Location: Exeter / Devon Posts: 30,081 Members Car: Skoda Fabia Mongrel Images: 5 Thanks: 75 Thanked 352 Times in 295 Posts	Re: Ir35 How much work is going to be based like this though. Speaking from experience of doing a recent ltd company, the amount of work needed to be done by law, even on a dormant ltd company is phenominal. Ful analysis of bank, disclosures/checklists, various regulations like FRSSE 2005, etc. All a bit daunting. Compared to a similar small sole trader / self eomployed person doing an Income and Expenditure account... Accountancy fees will be minimal if the work is simple and records are clear when it comes to producing a year end I&E account. BTW, I've only been training about 4 months so speak from a limited accountancy background. __________________ Jason - Only a Skoda. Custom Fabia Bonnet Lifter Kits - £45! Click Me. Cheesy bonnet lifter video to "raise me up" http://www.youtube.com/watch?v=hMnGECEi5Oc See the mongrel's 260bhp Dyno Video!

16-08-2006, 20:27	#11
*ncarring* Don't talk, drive! Join Date: Feb 2003 Location: The B roads of Britain Posts: 12,953 Members Car: 1983 Porsche 928S / 1972 MGB GT Thanks: 16 Thanked 94 Times in 77 Posts	Re: Ir35 If you join PCG they have framework contracts you can use as a template. As JPreston said, a key indicator is if you get paid for results, or just for time. If it's based on time, you're more likely to be seen just as an employee. Substitution is a difficult one for one-man companies but it means can you send another employee to do the same job - adds weight to the idea that the contract is a business-to-business relationship rather than a employer-employee one. I can show you an example of a contract if you're interested, based on distinct projects with specific amounts of effort against them that were all signed up individually, and could equally be cancelled individually. If you start a Ltd company you will almost certainly need an accountant as you will have to prepare annual returns and accounts for Companies' House. @Jason - the work done for a dormant company like mine is minimal - my accountant is now reaping the rewards for the hard work he had to do while I was active - VAT returns etc. You have to be registered for VAT if your turnover exceeds 60k per annum, and that means a quarterly VAT return, which is another job much better left to those who know what they're doing. Likewise if you form a company you have to register for PAYE, and complete proper returns to the IR including P60 at the end of the year, etc. __________________ Nick North Wiltshire RoADAR

16-08-2006, 20:28	#12
devonutopia Mongreller Join Date: Apr 2003 Location: Exeter / Devon Posts: 30,081 Members Car: Skoda Fabia Mongrel Images: 5 Thanks: 75 Thanked 352 Times in 295 Posts	Re: Ir35 I would say, it takes me a typical hour or so (depending on how records are kept) to do an I&E account, even for someone who earns upwards of £100k p.a on a self employed basis. Things get a little complicated when there's a proper business involved and a proper set of accounts needs doing, dealing with fixed assets, depreciation, stock, bank balancing, etc - and then limited company is the next step on from that. Nick. Its £61k since April. I only know because I had one non-vat reg'd person who we thought was trying to falsely show their income below this threshold to avoid this situation. naughty naughty. Oh, and being self employed means you might be able to claim things like a 40p mileage rate for business use (up to 10k ish I think) and things like use of home @ £5 a week (at discretion). Lots of little "expenses" to minimise that profit subject to 19%. __________________ Jason - Only a Skoda. Custom Fabia Bonnet Lifter Kits - £45! Click Me. Cheesy bonnet lifter video to "raise me up" http://www.youtube.com/watch?v=hMnGECEi5Oc See the mongrel's 260bhp Dyno Video! Last edited by devonutopia; 16-08-2006 at 20:32.

16-08-2006, 21:57	#14
devonutopia Mongreller Join Date: Apr 2003 Location: Exeter / Devon Posts: 30,081 Members Car: Skoda Fabia Mongrel Images: 5 Thanks: 75 Thanked 352 Times in 295 Posts	Re: Ir35 Well, all I know is that the excess of income over expenditure is subject to 19% tax. i.e on the "profit". This is effectively corporation tax. __________________ Jason - Only a Skoda. Custom Fabia Bonnet Lifter Kits - £45! Click Me. Cheesy bonnet lifter video to "raise me up" http://www.youtube.com/watch?v=hMnGECEi5Oc See the mongrel's 260bhp Dyno Video!

16-08-2006, 22:46	#16
SkodiRS BRISKODA Staff Join Date: Oct 2002 Location: darkest Hampshire Posts: 8,650 Members Car: Thanks: 0 Thanked 17 Times in 13 Posts	Re: Ir35 Yours sounds right Rob...and I don't even know. For those of you with Ltd companies....is your Spouse/partner listed as the company Secretary and is the company then deemed a "Husband and Wife" company? J: nice piece of information that £61k threshold. __________________ Adrian.

16-08-2006, 22:59	#18
devonutopia Mongreller Join Date: Apr 2003 Location: Exeter / Devon Posts: 30,081 Members Car: Skoda Fabia Mongrel Images: 5 Thanks: 75 Thanked 352 Times in 295 Posts	Re: Ir35 Limited Companies you have shares, and memorandums and articles of association drawn up etc. Basically you could have a 75% / 25% split in favour of you, say 3 shares at £1 for you, 1 share for the wifey. Would make you the controlling party then, but the wife would be a shareholder and have a voting right. The wife would make the sensible choice for company secretary, but there's nothing stopping you being a director and secretary, and her being a director as well - In fact she needn't be either. Just make sure Companies House know who is what though as an essential part of doing Ltd co. accounts is downloading this info and confirming it. __________________ Jason - Only a Skoda. Custom Fabia Bonnet Lifter Kits - £45! Click Me. Cheesy bonnet lifter video to "raise me up" http://www.youtube.com/watch?v=hMnGECEi5Oc See the mongrel's 260bhp Dyno Video!