In last week’s blog, we turned our attention to IR35 legislation: what it is and how it works. As promised, this week we are taking a closer look at the application and calculation of IR35.
This is a technical area and may require you to read this post more than once to grasp the issues.
IR35 legislation applies in the following circumstances:-
- a worker provides his or her services to a third party (known as the client).
- the arrangements for these services are not made directly with the client but through a third party (known as an intermediary)
- if the services had been provided under a contract between the client and the worker, the worker would have been regarded as an employee/employed earner of the client.
- the worker receives or is entitled to receive payment or another benefit from the intermediary that is not chargeable to tax as employment income, and
- the conditions of liability are satisfied according to the type of intermediary as follows:
Limited Companies: the payment for the work is received by the worker from the intermediary as remuneration for the services provided by the worker to the client, and the worker has at least a 5% shareholding or right to capital/profits in the company
Partnerships: the worker (and his relatives if applicable) are entitled to at least 60% of the partnership’s profits. Most of the partnership’s profits arise from services provided to just one client and that client’s associates, and any profit sharing arrangement in place is dependent on income arising by the partner from relevant engagements
Individual: the payment for the work is received by the worker from the intermediary as remuneration for the services provided by the worker to the client. It is unlikely that this situation would arise ・ agency rules might apply instead.
How is IR35 tax calculated? The main stage is working out the “deemed employment payment”, which represents the profit from the client for disguised employment work. The steps involved in working out the deemed payment are as follows:-
- Calculate the amount received by the intermediary in the tax year (i.e., to the 5th April, not the accounting year end) for IR35 relevant engagements;
- Deduct 5%, which is a flat-rate expense representing overheads and running costs of the intermediary;
- Add any payments/benefits received by the worker and his family in respect of the IR35 engagements which have not be paid by the intermediary and have NOT already been subjected to income tax, but would have been if the worker was an employee of the client;
- Deduct the intermediary’s expenses which would have been deductible against income tax if the worker was an employee and had funded them himself;
- Deduct the intermediary’s capital allowances which would have been claimed if the worker was employed by the client and had bought the assets himself;
- Deduct any contributions to an approved pension scheme by the company for the worker’s benefit;
- Deduct the worker’s salary (taxed via a payroll system), benefits in kind, Class 1 and Class 1A NICs due that year and paid by the intermediary.
The resulting figure is your “deemed payment” figure. If it is zero or a negative number, no further tax or National Insurance needs to be paid. If, however, it is a positive number, you will need to do the following:-
Calculate the employer’s National Insurance due on the deemed payment. Deduct this from the deemed payment. This new figure is your final deemed payment figure and is reported to the Revenue via your payroll system, which also calculates the amount of tax and employee’s National Insurance due.
The above is a general guide so before relying on it, please contact us for advice regarding your particular circumstances. If number crunching is not your game, let Southside Accountants Wimbledon look after your IR35 calculations for you.