Specialist IR35 Accounting Solutions

IR35 calculator

IR35 is a piece of tax legislation announced in 1999, which took effect in April 2000. The legislation means that the Inland Revenue can tax some contractors as though they are employees of their clients. Contractors who are deemed responsible for Inside IR35 tax pay significantly more than those paying outside IR35 tax, reducing their take-home pay by up to 25%.

IR35 was introduced because the Inland Revenue held the view that a large number of contract workers were treated as 'self-employed', when in fact they should have been treated as employees of the end client. As such the contract worker should be included on the client payroll, having tax and National Insurance contributions deducted each month. IR35 was introduced to tackle tax and National Insurance avoidance through the use of intermediaries, such as partnerships or personal service companies.

Contractors often use a limited company as a personal services company to obtain work, either directly from a client or via an agency. The Revenue service maintained that if that agency or personal service company were removed, then the contractor would, in fact, be a 'disguised employee' and thus eligible for tax and NI contributions each month. IR35 was introduced to tighten this particular tax avoidance loophole.

IR35 could affect a lot of contractors, and using an IR35 calculator can provide a financial indication if your business falls into the IR35 bracket. Determining whether you are affected by IR35 depends on a number of factors. Firstly, background factors, such as how the work was obtained and if the job advertisement called for a self-employed contractor or an employee will have a bearing on your eligibility with IR35.

If you are replacing an employee, then you may be considered to be an employee and therefore liable. If you have had a previous status ruling by HM Revenue and Customs, this may also be taken into account. Most importantly is how your contract with the end user is defined.

Not all contract workers are liable for inside IR35 tax deductions. The IR35 tax legislation is very complex, with a large 'grey area' of undefined categories into which some contract workers may fall. A genuine contract is based on the individual conditions that you will work to. If you have been given a contract by an agency or copied a contract from someone else, then you could be at risk from a Revenue review and subsequent backdated inside IR35 tax.

One of the other important factors in determining whether you are eligible for inside IR35 tax is Mutuality of Obligation, in which the employer is obliged to provide work for the employee and the employee, is obliged to accept it. This means that the employee has an expectation of regular employment until such time as they are made redundant or leave of their own accord. Most contracts do not include this Mutuality of Obligation, and can leave a contractor vulnerable to being obliged to pay inside IR35 tax.

It is possible to use an online IR35 calculator to determined how paying tax inside IR35 or outside IR35 will affect your income. An IR35 calculator is a simple system to determine your take home pay as a contractor dependent on your IR35 for each contract. An IR35 calculator will instantly tell you:

• Your current net monthly income
• How much this will decrease if you get caught by IR35
• The required salary to obtain the same income via permanent employment
• How much you would have to lower your hourly rate by to earn the same as someone inside IR35
• How much you would need to raise your income to achieve the same income whilst still paying IR35 penalties

Although using an IR35 calculator can give you the basics, it cannot take into consideration the other, more complex determining factors for IR35 tax liability. As a tool, an IR35 calculator is a useful first port of call if you are worried about the financial affect of being inside IR35. A more advanced IR35 calculator will also consider more detailed information such as annual expenses, your personal tax code and any annual pension contributions. You can also use an IR35 calculator to determine your eligibility for IR35 if you are a permanent employee by entering your gross salary into the calculator. Remember though, an IR35 calculator can only give you the very basic figures.

IR35 is a very complex and difficult area of UK taxation law. There are tax status specialists in the UK that are qualified to give you an expert opinion on your IR35 status. Some IR35 tax status specialists are able to provide IR35 insurance. IR35 can be purchased with different levels of covers and should always be considered by contractors that genuinely believe they are legitimately working outside IR35.

When seeking specific IR35 advice please keep in mind the below.

• Tax status specialists can advise your on IR35 status, accountants should not.
• IR35 could affect each contract you take, not the company as a whole.
• Your IR35 status is unlikely to be dependent on how long you work for the client. However your IR35 tax liability is affected by how long you work for your client.
• Any accountant that offers IR35 contract checks, IR35 status checks and IR35 insurance are likely to be seen as a Managed Service Company provider (not good).

At Churchill-Knight, we understand the complexities of this form of tax, and can advise you accordingly. Rather than employing a simple IR35 calculator, we can take your details and advise you with more certainty how your IR35 status will affect you financially. Our specialist advice may save you from being burdened with extra taxation and fines. Contact us for more details on IR35 and our IR35 calculator system and how you can avoid falling into the IR35 trap.

If you would like to know more about how umbrella companies can help you get peace of mind and give you control of your finances, call Churchill-Knight now and talk to one of our expert advisors.