IR35 explained without the jargon
IR35 asks a simple question. If your limited company did not exist and you worked for the client directly, would you be their employee? If the answer is yes, the contract is inside IR35 and the income is taxed much like a salary. If no, it is outside IR35 and your company is taxed as a normal business.
Who makes the decision depends on the client. Public sector clients have had to decide since 6/4/2017. Medium and large private sector clients have had to decide since 6/4/2021. If your client is a small private business, your own company still decides.
Status decisions and how to challenge them
A medium or large client must give you a status determination statement, which sets out its decision and the reasons. Read it carefully. Clients sometimes apply one blanket decision to every contractor, even where the actual working practices differ.
If you disagree, you can tell the client and set out why. The client must respond within 45 days, either keeping its decision with reasons or changing it. HMRC has an online tool called CEST, short for Check Employment Status for Tax, and many clients use it. It is a useful guide, but the real test is how the work is done day to day, not just the answers fed into a tool.
As your contractor accountant, we go through the statement with you, compare it with the contract and how you actually work, and help you write the reply if you decide to challenge it. Clear notes made at the start of a contract about who controls the work, and whether you could send someone else, make any later challenge much easier.
What is included
- IR35 contract and working practice reviews
- Help responding to status determination statements
- Annual accounts and Companies House filing
- Corporation tax returns
- Director payroll and dividend planning
- Deemed payment calculations for small clients
- VAT registration and returns
- Personal self assessment returns for directors
When a contract is inside IR35
For medium and large clients, the fee payer, usually the agency or the client, deducts income tax and National Insurance before paying your company. That income has already been taxed, so if your company records it correctly it can be passed to you without being taxed again.
Travel and subsistence for an inside IR35 contract are restricted, so you cannot claim your daily train fare to the client's office through the company. With a small private client the position is different. Your company works out a deemed payment at the end of the tax year and pays the tax through its payroll. We do that calculation and make sure it matches the payroll records.
Contractor accountant in Watford for company accounts and tax
Outside IR35, your company runs like any other small business. Annual accounts go to Companies House within nine months of the year end, corporation tax is paid nine months and one day after it, and the company tax return is filed within 12 months. Corporation tax is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between.
Many contractors take a modest salary through payroll and the rest as dividends. The first £500 of dividends each year is tax free. A contractor accountant plans that mix each year so you know what to set aside. If you are the only employee paid above the secondary threshold, your company cannot claim the Employment Allowance, which many contractors only discover after a year of payroll. VAT registration is needed once taxable turnover passes £90,000 in any rolling 12 months, and a full time day rate can pass that within a year.
Contracting from Watford and nearby towns
Contractors here tend to have more choice than most. London Overground and London Northwestern trains run from Watford Junction to Euston, the M1 and M25 are close by, and there are large offices in the town around Clarendon Road and at Croxley Park. Plenty of contractors live in Rickmansworth, Abbots Langley or Kings Langley and split their week between client sites and home.
For a contractor accountant in Watford, that mix matters. A contract at a permanent client office for years can look very different, for travel claims and for IR35, from short projects at different sites. We look at each new contract when it arrives, ideally before you sign it.
Between contracts and winding down
Gaps between contracts are normal. If your company stops trading for a while it can become dormant, but it still has to file accounts and a confirmation statement every year. Keeping the company open between roles is often simpler than closing and starting again, as long as the costs make sense.
If you take a permanent job or move to working through an umbrella, we help you decide whether to keep the company, make it dormant or close it, and how to take out any money left inside in the most sensible way.
Who this suits
- IT and software contractors working through a limited company
- Engineers and project managers on day rate contracts
- Contractors moving from permanent roles for the first time
- Contractors told their new contract is inside IR35
- Directors whose company is between contracts
Common questions
Does IR35 apply if my client is a small business?
Yes, but the decision sits with your own company rather than the client. If your company decides a contract is inside IR35, it works out a deemed payment at the end of the tax year and pays the extra tax through its payroll.
What is a status determination statement?
It is the document a medium or large client, or a public sector body, must give you to explain whether your contract is inside or outside IR35, with its reasons. If you disagree, you can challenge it and the client must reply within 45 days.
My agency deducts tax because I am inside IR35. Do I still need my company?
Not always. The company still has to file accounts and returns, which has a cost. If all your work is inside IR35 for the foreseeable future, an umbrella or a permanent role may be simpler, and we can compare the options.
Can I claim my train fare from Watford to London?
Only in some cases. On an inside IR35 contract, travel to the client is restricted. Outside IR35, travel to a temporary workplace can usually be claimed through the company, but a long running role at one office may count as a permanent workplace.
When did IR35 change for private sector clients?
Medium and large private sector clients have been responsible for deciding status since 6/4/2021. Public sector bodies have done this since 6/4/2017. Small private clients still leave the decision to the contractor's company.
How much corporation tax will my company pay?
The rate is 19% on profits up to £50,000 and 25% on profits above £250,000. Between those figures marginal relief applies. The limits are reduced if you have associated companies or a short accounting period.
How long does my company need to keep its records?
Company records must normally be kept for six years from the end of the financial year they relate to. That includes invoices, bank statements, payroll and dividend paperwork. Cloud bookkeeping keeps all of this in one place.
Can you review a contract before I sign it?
Yes. We read the contract and ask how the work will be done in practice, then tell you where it is likely to sit for IR35 and what could change that. It is much easier to change terms before signing than after.