IR35 and 'rainy days'
Discussion
I have been thinking about this - particularly in respect of how it works in the public sector.
Traditionally - working via a limited company has allowed contractors to keep funds in their company - to allow for leaner times. Any funds paid into the company are classed as limited company turnover. The contractor may take some funds out of this turnover as salary and dividends in the here and now, but have the option of building up the cash asset in their business, which allows them to continue paying themselves a salary during breaks between contracts - or make capital purchases for their company.
Obviously these excess funds are subject to corporation tax as they are classed as company profit - but they aren't taxed as salary until they are withdrawn - and when they are withdrawn - they are only taxed at the rate appropriate to the contractors earnings during that particular tax year.
So here is the rub. As I understand it - the public sector have now been forced to extract PAYE and NI at source before paying the contractor. This means that the entirety of the rate payed into the LTD company account has effectively taxed as if it were salary at the rate the contractor was earning at the time (e.g. 40%).
So my question is, if the contractor leaves some of these funds in the limited company account for a rainy day - and then extracts those funds at a later date (perhaps during a tax year where they have earnt very little and are therefore in a lower tax bracket) - will this be taxed again as income during the current tax year even though it has already been taxed in a previous one - or does the limited company account essentially become a savings account?
Traditionally - working via a limited company has allowed contractors to keep funds in their company - to allow for leaner times. Any funds paid into the company are classed as limited company turnover. The contractor may take some funds out of this turnover as salary and dividends in the here and now, but have the option of building up the cash asset in their business, which allows them to continue paying themselves a salary during breaks between contracts - or make capital purchases for their company.
Obviously these excess funds are subject to corporation tax as they are classed as company profit - but they aren't taxed as salary until they are withdrawn - and when they are withdrawn - they are only taxed at the rate appropriate to the contractors earnings during that particular tax year.
So here is the rub. As I understand it - the public sector have now been forced to extract PAYE and NI at source before paying the contractor. This means that the entirety of the rate payed into the LTD company account has effectively taxed as if it were salary at the rate the contractor was earning at the time (e.g. 40%).
So my question is, if the contractor leaves some of these funds in the limited company account for a rainy day - and then extracts those funds at a later date (perhaps during a tax year where they have earnt very little and are therefore in a lower tax bracket) - will this be taxed again as income during the current tax year even though it has already been taxed in a previous one - or does the limited company account essentially become a savings account?
I think you haven't quite understood it correctly. (you aren't alone!)
If you are classified as being 'inside' IR35 - ie; for all intents you are essentially an employee, then you have always had to pay tax as if you were an employee. This has previously been up to the contractor themselves to self asses - and safe to say people often tended to decide they were 'outside' IR35.
What has changed (what's being enforced) is it's the intermediary (usually the employment agency) who decides if you are inside our outside IR35. If you are inside IR35, then they tax you at source. If you are outside IR35, then nothing changes.
If you were always legitimately outside IR35 then there's basically no taxation impact of the new public sector rules.
ETA: To your question though, I'm not quite sure. If you were working 'inside IR35' and being taxed at source I think it's probably not even worth the hassle and expense of running a limited company. You've already been taxed at PAYE rates effectively, so may as well just take all the money in to personal accounts to do with it what you like.
If you are classified as being 'inside' IR35 - ie; for all intents you are essentially an employee, then you have always had to pay tax as if you were an employee. This has previously been up to the contractor themselves to self asses - and safe to say people often tended to decide they were 'outside' IR35.
What has changed (what's being enforced) is it's the intermediary (usually the employment agency) who decides if you are inside our outside IR35. If you are inside IR35, then they tax you at source. If you are outside IR35, then nothing changes.
If you were always legitimately outside IR35 then there's basically no taxation impact of the new public sector rules.
ETA: To your question though, I'm not quite sure. If you were working 'inside IR35' and being taxed at source I think it's probably not even worth the hassle and expense of running a limited company. You've already been taxed at PAYE rates effectively, so may as well just take all the money in to personal accounts to do with it what you like.
Edited by walamai on Friday 23 March 11:13
Edited by walamai on Friday 23 March 11:15
I'm a contractor too. All bar one of my contracts have been outside of IR35, I also have my contracts externally reviewed too, by the likes of QDOS as an example for my own piece of mind, and have had contracts amended to strength the IR35 status.
While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
walamai said:
If you were working 'inside IR35' and being taxed at source I think it's probably not even worth the hassle and expense of running a limited company. You've already been taxed at PAYE rates effectively, so may as well just take all the money in to personal accounts to do with it what you like.
So in essence - you cant provision for sick time, holiday time, out of work time etc like a ltd company contractor can (well you can - but it would be out of net pay in your personal account).Moonhawk said:
walamai said:
If you were working 'inside IR35' and being taxed at source I think it's probably not even worth the hassle and expense of running a limited company. You've already been taxed at PAYE rates effectively, so may as well just take all the money in to personal accounts to do with it what you like.
So in essence - you cant provision for sick time, holiday time, out of work time etc like a ltd company contractor can (well you can - but it would be out of net pay in your personal account).
walamai said:
I think you haven't quite understood it correctly. (you aren't alone!)
If you are classified as being 'inside' IR35 - ie; for all intents you are essentially an employee, then you have always had to pay tax as if you were an employee. This has previously been up to the contractor themselves to self asses - and safe to say people often tended to decide they were 'outside' IR35.
What has changed (what's being enforced) is it's the intermediary (usually the employment agency) who decides if you are inside our outside IR35. If you are inside IR35, then they tax you at source. If you are outside IR35, then nothing changes.
If you were always legitimately outside IR35 then there's basically no taxation impact of the new public sector rules.
ETA: To your question though, I'm not quite sure. If you were working 'inside IR35' and being taxed at source I think it's probably not even worth the hassle and expense of running a limited company. You've already been taxed at PAYE rates effectively, so may as well just take all the money in to personal accounts to do with it what you like.
It's the Public Sector client who determines the status of the role and not the agent. If you are classified as being 'inside' IR35 - ie; for all intents you are essentially an employee, then you have always had to pay tax as if you were an employee. This has previously been up to the contractor themselves to self asses - and safe to say people often tended to decide they were 'outside' IR35.
What has changed (what's being enforced) is it's the intermediary (usually the employment agency) who decides if you are inside our outside IR35. If you are inside IR35, then they tax you at source. If you are outside IR35, then nothing changes.
If you were always legitimately outside IR35 then there's basically no taxation impact of the new public sector rules.
ETA: To your question though, I'm not quite sure. If you were working 'inside IR35' and being taxed at source I think it's probably not even worth the hassle and expense of running a limited company. You've already been taxed at PAYE rates effectively, so may as well just take all the money in to personal accounts to do with it what you like.
Edited by walamai on Friday 23 March 11:13
Edited by walamai on Friday 23 March 11:15
EmilA said:
I'm a contractor too. All bar one of my contracts have been outside of IR35, I also have my contracts externally reviewed too, by the likes of QDOS as an example for my own piece of mind, and have had contracts amended to strength the IR35 status.
While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
Has anybody been subject to an investigation and walked away based on the wording of a contract? The reason I ask is because I read a while back that if you are investigated, then HMRC will just get in contact with your hiring manager and talk about the role and how the contractor actually works rather than what's in the contract and kind of not really be too concerned by the wording. If you're seen to act like an employee with regards to your actual working practices rather than what's on paper, then they'll have a go anyway.While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
This is purely something that I've read and honestly don't know the answer.
I found this article - and it raises some interesting points.
https://www.contractorcalculator.co.uk/contractors...
Apparently IR35 legislation is incomplete. They were supposed to look at it from both the tax and employment rights perspective, but the employment rights part got forgotten about.
https://www.contractorcalculator.co.uk/contractors...
Apparently IR35 legislation is incomplete. They were supposed to look at it from both the tax and employment rights perspective, but the employment rights part got forgotten about.
Autopilot said:
Has anybody been subject to an investigation and walked away based on the wording of a contract? The reason I ask is because I read a while back that if you are investigated, then HMRC will just get in contact with your hiring manager and talk about the role and how the contractor actually works rather than what's in the contract and kind of not really be too concerned by the wording. If you're seen to act like an employee with regards to your actual working practices rather than what's on paper, then they'll have a go anyway.
This is purely something that I've read and honestly don't know the answer.
HMRC can look at the actuality of the working arrangement & if it doesn't tally with th e contract they can ignore the contract & deem you insdie IR35. It doesn't matter what is written down, it's what is actually happening that matters.This is purely something that I've read and honestly don't know the answer.
Autopilot said:
EmilA said:
I'm a contractor too. All bar one of my contracts have been outside of IR35, I also have my contracts externally reviewed too, by the likes of QDOS as an example for my own piece of mind, and have had contracts amended to strength the IR35 status.
While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
Has anybody been subject to an investigation and walked away based on the wording of a contract? The reason I ask is because I read a while back that if you are investigated, then HMRC will just get in contact with your hiring manager and talk about the role and how the contractor actually works rather than what's in the contract and kind of not really be too concerned by the wording. If you're seen to act like an employee with regards to your actual working practices rather than what's on paper, then they'll have a go anyway.While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
This is purely something that I've read and honestly don't know the answer.
IR35 cases are built on everything from the contract, the agency / client contract/ the behaviour within your role and the actual job your doing. Why they don't bring out a tax code that's between permy and self employed to solve it all I have no idea.
Its pretty much impossible to know you are 100% outside of IR35 or not as there are so many variables. I was asked 100's of questions by HMRC, each one of them loaded and I'm sure they were scored.
Four Litre said:
Autopilot said:
EmilA said:
I'm a contractor too. All bar one of my contracts have been outside of IR35, I also have my contracts externally reviewed too, by the likes of QDOS as an example for my own piece of mind, and have had contracts amended to strength the IR35 status.
While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
Has anybody been subject to an investigation and walked away based on the wording of a contract? The reason I ask is because I read a while back that if you are investigated, then HMRC will just get in contact with your hiring manager and talk about the role and how the contractor actually works rather than what's in the contract and kind of not really be too concerned by the wording. If you're seen to act like an employee with regards to your actual working practices rather than what's on paper, then they'll have a go anyway.While operating within IR35, I went through an Umbrella agency, as it makes more sense to do so than go through my LTD company. It's what I would advise you to do as well if your were in a similar position.
This is purely something that I've read and honestly don't know the answer.
IR35 cases are built on everything from the contract, the agency / client contract/ the behaviour within your role and the actual job your doing. Why they don't bring out a tax code that's between permy and self employed to solve it all I have no idea.
Its pretty much impossible to know you are 100% outside of IR35 or not as there are so many variables. I was asked 100's of questions by HMRC, each one of them loaded and I'm sure they were scored.
Autopilot said:
To paraphrase what you've just said, that's right, you get treated like an employee by paying PAYE/NI on the full amount of income and you don't get any sick pay, holiday etc etc like an employee does so being inside IR35 gives you the worst of being a contractor and of being an employee
Correct, as you will have paid Co Ni on the gross rate into the umbrella Co in addition to the usual Emp NI and tax that a PAYE employee would pay. Oh and the umbrella Co fees as well, which aren't tax deductable.Yes OK you are on a higher pay rate than a normal employee, but does that difference cover the lack of sick leave and holiday pay, plus compensate for the short notice dismissal without redundancy payment and lack of access to the usual out of work government benefits ???
I was looking into go contracting, but my accountant pay told me no.
Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know. Its a bit like the Kray Twins telling you to hold back on violence!
He said its virtually impossible to prove you are outside IR35 anymore, and they will make your life hell if you get investigated.
I stayed an employee.
Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know. Its a bit like the Kray Twins telling you to hold back on violence!
He said its virtually impossible to prove you are outside IR35 anymore, and they will make your life hell if you get investigated.
I stayed an employee.
Steviesam said:
Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know.
That's coz if you are inside almost no expenses can be offset against earnings received in lieu of that contract.What is unclear tho, to my knowledge at least, is if you only have one contract in any Co year that is deemed inside, how does the company maintain any assets already owned if it only receives income net of tax ???
Plus pension rules appear to have been run ruff shod over by the umbrella companies that one is coerced into using, as in not being able to choose with provider and how much they will allow to be put in before tax is deducted.
Steviesam said:
I was looking into go contracting, but my accountant pay told me no.
Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know. Its a bit like the Kray Twins telling you to hold back on violence!
He said its virtually impossible to prove you are outside IR35 anymore, and they will make your life hell if you get investigated.
I stayed an employee.
I'd get a new accountant.Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know. Its a bit like the Kray Twins telling you to hold back on violence!
He said its virtually impossible to prove you are outside IR35 anymore, and they will make your life hell if you get investigated.
I stayed an employee.
I don't know what rules he would be willing to bend but there isn't much flex. Most contractors pay themselves a small PAYE/NI friendly wage, pay dividend tax, charge VAT and claim it back, claim expenses and pay Corp Tax. There really isn't any flex there so am interested to know how he would bend the rules.
I am a contractor and the Government are buying my services as I'm running a large programme for them. My hiring manager used the Employment Status Tool which concluded I was outside of IR35. The Govt ran an audit of their use of contractors and how my outside IR35 status was determined. After going through this, it was then agreed I'm outside IR35.
I'd also have a read of this - https://www.contractoruk.com/ir35/how_mcdm_ltd_bea...
HMRC used an expensive barrister to take a contractor to court regarding IR35 status. The contractor represented himself and he won. It doesn't set a precedence of course, but goes to show that even though HMRC won a number of key points, they failed on the basics.
Autopilot said:
Steviesam said:
I was looking into go contracting, but my accountant pay told me no.
Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know. Its a bit like the Kray Twins telling you to hold back on violence!
He said its virtually impossible to prove you are outside IR35 anymore, and they will make your life hell if you get investigated.
I stayed an employee.
I'd get a new accountant.Now, he will bend the rules more than most and will play all the tricks possible. So for him to say to me no, its just not worth it now, tells me all I need to know. Its a bit like the Kray Twins telling you to hold back on violence!
He said its virtually impossible to prove you are outside IR35 anymore, and they will make your life hell if you get investigated.
I stayed an employee.
I don't know what rules he would be willing to bend but there isn't much flex. Most contractors pay themselves a small PAYE/NI friendly wage, pay dividend tax, charge VAT and claim it back, claim expenses and pay Corp Tax. There really isn't any flex there so am interested to know how he would bend the rules.
I am a contractor and the Government are buying my services as I'm running a large programme for them. My hiring manager used the Employment Status Tool which concluded I was outside of IR35. The Govt ran an audit of their use of contractors and how my outside IR35 status was determined. After going through this, it was then agreed I'm outside IR35.
I'd also have a read of this - https://www.contractoruk.com/ir35/how_mcdm_ltd_bea...
HMRC used an expensive barrister to take a contractor to court regarding IR35 status. The contractor represented himself and he won. It doesn't set a precedence of course, but goes to show that even though HMRC won a number of key points, they failed on the basics.
Your accountants advice is baffling, unless what you want to do is not really contracting.
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