IR35 calculators with IR35 risk calculation
IR35 Calculators
Not sure whether you fall Inside or Outside of IR35? Use our online IR35 calculator.
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An introduction to IR35
IR35 (Intermediaries Legislation number 35) is legislation, first introduced in April 2000, that aims to eliminate tax avoidance and National Insurance Contributions (NICs) avoidance through the use of intermediaries, such as Personal Service Companies or partnerships. IR35 is focused on workers who:
- Could be regarded as an employee of the client for tax accounting purposes.
- Could be regarded as an employee in employed earner's employment by the client for NIC purposes.
in HMRC's eyes, the key to IR35 is the relationship between the client and the worker. If the relationship is seen to be the same, then HMRC believes that tax and NIC's should be collection in the same manner as a traditional employee, as though employed directly through the company.
How does this work with contracting? Contractors typically provide a specialist skill to augment a companies capability for a short period. This could be to support a project, to trial a new capability, to install technology systems or machinery etc. In these instances, the contractor is providing a service to one ltd company (the client) that would typically be provided by another ltd company (the contractor).
HMRC love Contractors who form their own limited companies as it makes it very clean cut for them to understand the relationship, it's a traditional business model. Some contractors however don't want to form their own limited company, reasons include:
- They don't know if contracting is what they want to do long term
- They don't want the cost or perceived hassle of running a limited company
- They are worried about the responsibilities of running a limited company
- They cannot run a limited company for legal reasons
Due to the contractors preference and the clients desire for a temporary workforce, umbrella companies were borne. Umbrella Companies employee the contractors in order to provide accounting a payroll services to the contractors and enable them to work for the client without any of the tax, accounting and HMRC responsibilities associated with running a limited company.
Unfortunately, some umbrella companies became involved in bad practices:
- Allowing contractors to claim more expenses that were actually incurred
- Submitting false figures to HMRC
- Moving money offshore and operating a loan scheme which meant the contractor wasn't paid, they were repaying a loan
These bad practices led to HMRC tightening up legislation and getting tougher with the industry. This has led to a number of good and bad decisions, the latest complexity is in terms of 'direction and Control'. Contractors who use an umbrella company typically never see the umbrella company, they just use them for the service. Although employed by the umbrella, they don't work for them. They complete work as strategically directed and controlled by the end client (as a contractor who works for their own limited company does).
There are many examples of challenges within the umbrella company industry but there are three key points for you to take away:
- HMRC does not like umbrella companies due to the historical issues and because they make it easier for contractors to take contracts and legally pay less tax that a traditional PAYE employee
- If you do decide to use an umbrella company, choose a reputable umbrella company with a good reputation and track record.
- If you are serious about contracting, set up your own limited company. You will earn more, it is less controversial with HMRC and less hassle due to the constant challenges to umbrella companies created by HMRC. Setting up your own limited company will cost a lot less than you think, choose a good accountancy firm and they will set up and file your returns for you and advise you relevant tax advice.
Am I 'Inside' or 'Outside' IR35?
This is the most important question a contractor should ask themselves. When IR35 was introduced it was a typically poor planned and conceived HMRC initiative creating more grays than black and white clear cut lines for accountants and contractors to follow.
The resulting confusion over IR35 and it's interpretation resulted in a number of courts cases. These legal cases have provided the framework for an IR35 means test which helps to define whether a contractor is Inside or Outside of IR35 legislation. The IR35 means test was further galvanized in May 2012 when HMRC updated the tests, taking a risk based approach.
IR35 tests are now used by intermediaries (like umbrella companies) to assess whether HMRC would view the contractor as an employee of the end client. iCalculator have provided an online IR35 Status calculator which you can use to confirm whether you fall inside or outside of IR35.
How does IR35 affect me?
- If you fall Inside IR35: Your earnings are subject to PAYE, income tax and national insurance contributions deductions must be made from your earnings.
- If you fall Outside IR35: You can take dividend payments from your company that are not subject to national insurance contributions. Note that you must operate your own limited company and NOT use an intermediary (like an umbrella company) in order to receive dividend payments.
IR35 Status calculator
The IR35 Status calculator refers to specific elements of the contract and the individual's working practices and provides a IR35 risk score which is recognized by HMRC. The IR35 risk score defines how likely HMRC are to review whether IR35 applies to you. The higher the risk, the more likely it is that IR35 applies to you and the more likely that HMRC will look at your payroll and accounts. The IR35 risk table is split into three categories:
- Low Risk [Green]: There is a low risk that you are inside IR35 and a low risk of HMRC checking whether IR35 applies to you. So, very few or none of the key elements of the contract suggest that IR35 applies.
- Medium Risk [Yellow]: There is a medium risk that you are inside IR35 and a medium risk of HMRC checking whether IR35 applies to you. Some areas of the contract suggest that IR35 may apply.
- High Risk [Red]: There is a high risk that you are inside IR35 and a high risk of HMRC checking whether IR35 applies to you. There are several key areas of the contract that suggest IR35 applies.
IR35: Business Entity Tests
The IR35 status calculation looks at twelve specific business entity tests as defined by HMRC. These include:
- Business Premises:
- Professional Indemnity Insurance:
- Efficiency:
- Assistance:
- Advertising:
- Previous PAYE:
- Business Plan:
- Repair at own Expense:
- Client Risk:
- Billing:
- Right of Substitution:
- Actual Substitution:
IR35: Take the Test
Answer the following questions to receive a IR35 Risk score for your contract. The IR35 Guage above will alter as you answer the questions.
If you are looking for accounting support with your new limited company or if you need support setting up your accounts as a contractor, iCalculator recommends Tempo, a solid, dependable company that the team at iCalculator have known and worked with since 2009.
Self Assessment Guides for Contractors and Freelancers
- Capital Allowances Introduction
- Capital Allowances Explained
- Cash Basis Accounting
- Freelancing in the UK
- Limited Company Pros and Cons
- Self Employed Expenses
- 'Sole Trader' Explained
- 'Uniform Tax' Explained
- Income Tax and NICs for a share fisherman
- Sole Trader Tax Tips
- Universal Credits for the self-employed
- Tax return - Common mistakes
- Tax tips for limited companies
- Workplace Pensions for staff
- Improving your IR35 position
- Construction Industry Scheme (CIS) subcontractor
- P60 explained
- Payslips Explained
- VAT Flat Rate Scheme
- Tax on Pensions Part 1
- Tax on Pensions Part 2
- Correct Invoicing
- Employing staff for the first time
- Entrepreneurs' Tax Relief
- Money-saving tips for business owners
- Mortgage interest tax relief (Buy-to-let)
- National Insurance explained
- Overseas pensions tax relief