IR35 is the legislation that determines whether a contractor working for a particular client is acting as an external supplier or in a way that constitutes being an 'employee' for tax purposes.
Before April 2021, contractors working on contracts deemed to be inside IR35 - that is, working in a way very similar to an employee of the client company - were entitled to claim a 5% general expense allowance on the value of the contract.
Significantly, there was no need to provide receipts for expenses claimed in this
way. The 5% was a standard allowance to cover expected costs like premises,
stationery supplies, marketing, training and professional insurance policies.
However, since April 2021, new rules have been introduced which mean in most cases, contractors can no longer claim general expenses on contracts deemed to be inside IR35.
Three rules for IR35 expenses
Contracts that fall outside of the scope of IR35 allow contractors to work via limited companies, which in turn means you can pay most of your income as a dividend instead of a salary, and reduce the amount of income tax and national insurance you pay.
When a contract falls inside IR35, the contractor must pay income tax on their earnings. The ability to claim business expenses reduces this income tax liability, but under the new system the previous 5% general expenses rule has been significantly scaled back.
There are three different rules when it comes to claiming expenses inside IR35:
On public sector contracts the 5% allowance no longer exists for all contracts.
On most private sector contracts the 5% allowance ended as of April 6th 2021.
The 5% allowance remains on private sector contracts if the client is a 'small company'.
As a result, unless your contract is with a small company in the private sector, you should give extra thought to how your profits and tax exposure may be affected by this change, and price your services accordingly.
What about specific expenses?
The new rules apply to general expenses - but what about specific expenses incurred while working on a job, for example travelling between two of the client's sites?
In this case, the expenses relate specifically to the cost of carrying out the contract, and there is an argument that you should be able to claim them back. However, submitting an expenses claim to the client could be viewed as an employee-like act, bringing more contracts within the IR35 rules.
A solution is to incorporate specific expenses into the invoice submitted to the client as a general disbursement - which again can influence the price quoted upfront for a particular job.
How Primis can help
Primis provide a range of payroll and compliance solutions for contractors, including those whose work falls within the scope of IR35 legislation some or all of the time.
By working under the Primis PAYE option, you can comply with the relevant IR35 rules. Alternatively we offer a limited company option if you would prefer to make the appropriate deductions and ensure compliance in this way.
To find out more about our IR35 services for contractors, contact Primis today and we will be happy to discuss the various options in detail with you.