New to contracting?

1 Introduction
2 IR35
- 2.1 What is IR35?
- 2.2 How does IR35 affect me?
3 Expenses
4 Links

By Lisa Keeble, a Director of «www.contractorumbrella.com»

If you have just secured your first contract, your client may have spoken to you about IR35 and umbrella companies, and you may now be feeling completely confused!

We hope that the following information will help to answer some of your questions and make a bit more sense of it all.

IR35

What is IR35?

IR35 is important and needs to be considered by all contractors and freelancers.

The legislation was introduced by the Inland Revenue in April 2000 and was designed to tackle tax and national insurance avoidance. Their view was that a large number of contractors who worked as ‘one man band’ companies were often treated as self-employed but were, to all intents and purposes, employees of the end client. This was based on the terms and conditions that the contractor worked under.

How does IR35 affect me?

The IR35 status of your contract determines your tax and national insurance contributions.

Any good umbrella company or accountant should be able to arrange a review of your contract. If it is determined that your contract is inside IR35 then your payments will be subject to income tax, employee’s national insurance and employer’s national insurance. You will be able to claim business expenses and they will be processed as a tax benefit i.e. before the deduction of tax.

If your contract is outside IR35, you will be able to draw dividends from your own or a managed limited company. Typically, you will receive a minimum wage on which income tax and national insurance contributions are payable but the balance of your earnings paid as dividends will not attract national insurance deductions. Corporation tax of 19% is payable on the limited company’s profits.

Expenses

What can I claim?

You can only claim those expenses that are permitted by the Inland Revenue. These must be costs that you personally have incurred and they must be wholly caused by and entirely attributable to the contract. You must ensure that any expense you claim is supported by a receipt.

There is a lot of information and advice available on what expenses are legitimate; try these from «contractor calculator» and «Business Link»

What is an umbrella company?

An umbrella company operates as an alternative to you running your own limited company.

An umbrella company will raise invoices on your behalf and will then make payment to you when they receive funds from your agency/client with the appropriate deductions for tax and national insurance.

There should be no difference in the return you receive from one umbrella company over another, other than the fees that they charge. As with any other service, you should ensure that you thoroughly research the umbrella company that you decide to use. There are many specialist contractor sites that will offer advice if you cannot get a personal recommendation.

What is a dispensation?

A dispensation allows the umbrella company to process their contractors’ expenses without having to record them all on a P11D form which would then be forwarded to the Inland Revenue as part of their accounts. It does not mean that you, as a contractor, will not have to produce receipts if you use an umbrella company and it does not mean that you will be able to claim for expenses that you have not incurred.

What is a subsistence claim?

A subsistence claim is an expense which does not have to be supported by a receipt. The Inland Revenue only permit a subsistence claim if you have worked away from home overnight; the amount claimable is £5 per night within the UK and £10 per night overseas. Any other expenses that you claim must be supported by receipts.

Obviously there are plenty of umbrella companies to chose from but, bear in mind that, if you are unsure about any of the information that they provide, it can be easily verified by a quick phone call to your local Inland Revenue office.

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