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Inside IR35: Claiming expenses from the Company

It’s understandable that many contractors continue to be concerned about the impact of being inside or outside IR35. Your situation, whether inside or outside, has an effect on your tax contributions and take-home income. As a result, both the client and the contractor must have a clear knowledge of their working relationship in order for it to stay fair. This blog will give you an overview of the expenses you can or can’t claim from the company when you are inside IR35.

Inside IR35: Claiming expenses from the Company
In this article we cover:
  1. What’s the change for IR35?
  2. What expenses you can and can’t claim if you are inside IR35?
  3. Benefits you can access when you are inside IR35
  4. IR35 Review

What’s the change for IR35?

When your IR35 status is changed to inside, you will lose the ability to pay yourself tax-efficiently through a combination of low salary and high dividends. This, therefore, is the source of outrage surrounding the controversial IR35 legislation. Contractors must pay the same taxes as workers, but without the safety, security, or statutory benefits associated with the employment. HMRC had intended to implement modifications to IR35 in April 2020, but this was delayed until 6 April 2021 due to the coronavirus pandemic.

The upcoming amendments will place the responsibility on the end client to determine whether or not the engagement falls within or outside of IR35. If the contract does not fall within IR35, the contractor may continue to operate via their limited company, as usual, collecting gross payment from the end client and paying corporation tax on the profits of their limited company after deducting permissible expenses. If the contract comes inside IR35, the end client or fee payer (in the case of recruitment agencies) is responsible for calculating, deducting, and paying income tax and national insurance liabilities.

Also See: List Of Business Expenses You Can Claim As A Limited Company

What expenses you can and can’t claim if you are inside IR35?

The most overlooked IR35 factor is the 5% expense allowance. HMRC establishes this for contractors who fall under the scope of the Act. The allowance is intended to allow contractors to reclaim 5% of their earned income. It should cover the running costs of a business. However,this provision was recently scrapped for contractors working in the public sector and from 6th April 2021 onwards, it has also been abolished from the private sector. Now, you need to pay taxes like other employees.

Contractors working under IR35, regardless of whether they work in the private or public sector, can continue to claim tax relief on pension contributions made on their behalf by the PSC.

However, due to recent modifications to travel and subsistence (T&S) allowances, contractors working inside IR35 should refrain from claiming routine expenses such as travel, mileage, hotels, and meals. HMRC is on the case and will categorise this as earnings, forcing you to pay tax and national insurance contributions on any erroneously declared T&S expenditures.

Expenses for which a contractor could have claimed a deduction against their earnings under normal employment income rules are also allowed in case the contractor was employed by the client at some point and met those expenses with those earnings. Having said that, employment expenditures are generally difficult to claim, as they must satisfy the wholly, exclusively, and necessarily test. In other words, they must be absolutely necessary for the performance of employment duties. In many cases, HMRC criteria are usually not met by the Contractors.

Also See: What Expenses to Claim For When Working From Home In the Time of Coronavirus

Benefits you can access when you are inside IR35

While you will pay more tax and lose the opportunity to claim travel and subsistence allowances, there are still some advantages to working within IR35. To begin, this implies that the contractor or customer will avoid significant HMRC bills for unpaid taxes, interest, and penalties if they are caught outside when they should be inside. Additionally, it is compatible with the flat-rate VAT scheme. When you are inside IR35, you could still be eligible for flat-rate benefits.

IR35 Review

Many contractors would like to work outside of IR35 since they earn more money. As a result, it is critical that you undergo a thorough and impartial IR35 evaluation that appropriately reflects your employment status. While you should not seek to avoid taxation by concealing your genuine employment status, the distinction between self-employment and employment might be confusing at times. Contract evaluations are an excellent approach to demonstrate that you used due diligence in deciding whether you fall within or outside of IR35. It can help you avoid penalties in the future if HMRC challenges your IR35 status.

Conclusion

Given the minimal benefits of working under IR35, it is critical that as a contractor – irrespective of the sector in which you work – you must receive a fair and proper IR35 evaluation that appropriately assesses your employment status. We can provide you with the specialised advice you require to assist in adapting your employment status to remain within or outside of IR35.

If you need assistance identifying your IR35 status and want to maximise the benefits of your current scenario, Contact DNS Accountants now. Get in touch with us immediately at 03330886686, or you can also e-mail us at info@dnsaccountants.co.uk

Also See: Limited Company Expenses You Can Claim When Working From Home

Disclaimer : - "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.

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