Are you a contractor? If you work for someone else, it is important to know whether you are working for that person in an employed capacity or in a self-employed capacity as an independent contractor.
Your employment status will determine the charge to tax on income from your employment or self-employment. It will also determine the class of NICs, which are to be paid.
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Does the IR35 deemed payment have to be paid as salary on 5 April?
No. The deemed payment is simply a means to calculate the tax and NICs due, whether or not any payment is actually made to the worker. It can be paid as salary, but the rules do not require this to happen. It may be given to the worker (or others) in the form of dividends, or may be retained in the Personal Service Company.
Where the PSC is treated as making a deemed payment and pays a dividend, it may make a claim for relief. If HMRC is satisfied that relief should be given in order to avoid a double charge to tax, relief is given setting the amount of the deemed payment against the dividend so as to reduce the dividend.
The deemed payment and employer's NICs due on it can be deducted when calculating your PSC's corporation tax.
When must I pay any additional tax and NICs?
Any tax and NICs due at the end of the tax year as a result of the calculation of the IR35 deemed payment should be paid according to the normal PAYE and NIC payment rules.
Most of the information needed to calculate the final tax and NICs liability should be available before 5 April and it should be possible to make an estimate of the tax and NICs due at that point. It will be important to keep records of relevant income and expenditure so that you can do this.
If you stop working through your PSC or partnership before the end of the year, the deemed payment should be calculated in the normal way, and will be treated as having been made immediately before you stop.
What expenses can I deduct in calculating the IR35 deemed payment?
In addition to the flat rate deduction of 5 per cent, the following expenses can be deducted in the calculation.
This will depend on your pattern of working. If you work through your Personal Service Company or partnership for a series of clients in different places, you may be able to deduct the costs of travelling to your clients' places of business. Provided you do not expect to spend more than 40 per cent of your working time at any one site you are entitled to a deduction for all journeys from home to the clients' premises.
If you do spend more than 40 per cent of your time at a single site, but the engagement is both expected to, and actually does, last for no more than 2 years, a deduction for travel costs will also be available.
What about company cars?
For years 2002-03 onwards, where the intermediary provides a vehicle for you and you would have been entitled to an amount of mileage allowance relief for a tax year in respect of the use of the vehicle if you had been employed by the client and the vehicle had not been a company vehicle, a deduction is given at Step Three for that amount.
If the Personal Service Company or partnership provides you with a car for your private use, you will have to pay tax on this benefit according to the rules that apply to other employees. The amount of the car benefit charge can be deducted (at Step 5) in calculating the deemed payment.
Class 1A NICs paid on the company car benefit will be deductible in the calculation of the IR35 deemed payment, alongside other employer's NICs.
Your PSC or partnership will be able to set any costs of providing the car, including capital allowances, against its taxable profits.
What do I need to put on my Self Assessment return?
The IR35 deemed payment is treated as income from employment with the Personal Service Company or partnership. It should be recorded on your Self Assessment return on the supplementary employment pages. If you have any other income from employment with the same PSC or partnership you should record the total amount, including the deemed payment.
How do I apportion expenses between engagements that are affected by the new rules and those which are not?
In calculating the IR35 deemed payment, you can deduct expenses paid by the Personal Service Company or partnership which you would have been allowed to claim against tax if you had been an employee of the client, and spent the money yourself. These expenses must relate specifically to your engagement with that client. You will have to keep suitable records to be able to identify the correct amounts.
For example, this could be by reference to car mileage to work out what part of the motoring expenses related to engagements affected by the new rules.
If a client makes a single payment in respect of two or more workers, how will the income be split between them?
This will depend on the particular facts and circumstances. If a Personal Service Company or partnership receives a payment in respect of services provided by more than one worker, the payment should be apportioned between them, by the PSC or partnership, on a reasonable basis. HMRC will re-apportion any payment if it appears the company's or partnership's basis of apportionment is unreasonable. The company can appeal against the decision of HMRC.
What are my tax and NICs liabilities if I work overseas?
If you work overseas your tax and NICs liabilities are the same as if you were employed directly by the overseas client.
Can I avoid the legislation by using an offshore Personal Service Company?
No. If you would have been liable to UK tax and NICs had you been employed directly by the client, you must pay UK tax and NICs under these rules, whether or not your service company is located in the UK.
If an offshore company fails to deduct and account for PAYE tax and NICs under the IR35 legislation, liability to pay tax and NICs can be transferred to you. Action to recover employer's NICs not paid by an offshore company could also include action against any assets of that company located in the UK.
HMRC has powers to obtain details of payments to offshore companies from the records of clients and agencies.
You can see if you fall Inside or Outside of IR35 using the IR35 Status Calculator
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