How does being inside IR35 work if you have staff? How does being inside IR35 work if you have staff?
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  1. #1

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    Default How does being inside IR35 work if you have staff?

    I am contracting for a large bank via an agency. As with most I'm bracing myself for the new rules in April 2020 and trying to understand any potential impact as best I can. I don't hold much confidence in the client and agency being particularly contractor friendly, especially given another bank's recent position on the matter (HSBC), so am bracing myself for a worst case scenario Inside IR35 decision

    At the moment, the model is well understood. From an invoice, we take off business expenses such as salary, pension contributions, accountancy fees etc. What's left is the gross profit. 20% of that goes to corporation tax, leaving net profit which can be paid as dividend. Easy.

    As I understand it, if caught by IR35 we get a 5% business expenses allowance, and the rest is assumed to be personal income and will be taxed as such by the agency. So 95% of my invoice will be treated as if it is personal income and will be taxed at source. That's OK if your limited co only employs you (well, it's not, but that's another argument), but what happens if you have staff costs other than your own?

    In my case I employ a part time office administrator on a 1 day a week basis. I pay her a small salary and pension contributions.

    In the Inside IR35 model, my need for an office admin doesn't change, so I still need to employ her and pay her. But the company income that I would be paying her from would already have been taxed on the incorrect assumption that all of that income is mine.

    Are there provisions in the Inside IR35 rules to cover staff costs like this? How is it meant to work?

  2. #2

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    Quote Originally Posted by Jakes Daddy View Post
    I am contracting for a large bank via an agency. As with most I'm bracing myself for the new rules in April 2020 and trying to understand any potential impact as best I can. I don't hold much confidence in the client and agency being particularly contractor friendly, especially given another bank's recent position on the matter (HSBC), so am bracing myself for a worst case scenario Inside IR35 decision

    At the moment, the model is well understood. From an invoice, we take off business expenses such as salary, pension contributions, accountancy fees etc. What's left is the gross profit. 20% of that goes to corporation tax, leaving net profit which can be paid as dividend. Easy.

    As I understand it, if caught by IR35 we get a 5% business expenses allowance, and the rest is assumed to be personal income and will be taxed as such by the agency. So 95% of my invoice will be treated as if it is personal income and will be taxed at source. That's OK if your limited co only employs you (well, it's not, but that's another argument), but what happens if you have staff costs other than your own?

    In my case I employ a part time office administrator on a 1 day a week basis. I pay her a small salary and pension contributions.

    In the Inside IR35 model, my need for an office admin doesn't change, so I still need to employ her and pay her. But the company income that I would be paying her from would already have been taxed on the incorrect assumption that all of that income is mine.

    Are there provisions in the Inside IR35 rules to cover staff costs like this? How is it meant to work?
    You will no longer get the 5% - that is being removed.

    If you wish to employ someone to do your admin, you will need to pay from that either from company reserves or post tax income. IR35 does not allow for paying employees (or accountants or anything else) any more than a real employee could pay someone to do their admin pre-tax.

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    You are an employee now, you don’t have ‘staff’. It’s no different from you paying a cleaner or a child minder.

    You’ll just have to go back to calling your office admin your wife (aka Jack’s Mummy).

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    Wow, it sucks more that I imagined to be inside IR35!

    Quote Originally Posted by cojak View Post
    You’ll just have to go back to calling your office admin your wife (aka Jack’s Mummy).
    What are you suggesting? That I employ my wife just to utilize her personal allowance? As if ....

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    1999 called and would like their question back...
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    Well, worst case scenario notwithstanding, and I too am bracing for the worst of reactions from agencies and clients alike, what I still do not understand is the following;

    The IR35 decision is (currently) not just based on a contract/working practices, but how you also run your company; marketing, employing others, other forms of income... etc.

    Does All of the above go out the window in the new world? Would not the agencies and clients Have to pay attention to that?

    I am in a similar-ish boat in that I have other forms of regular income but the cost of keeping that afloat with accountants and the rest becomes non-competitive. Dunno...

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    Quote Originally Posted by simes View Post
    The IR35 decision is (currently) not just based on a contract/working practices, but how you also run your company; marketing, employing others, other forms of income... etc.
    Not really. In the old days of the Business Entity Tests these were flags but that fell by the way side a long time ago. It is on a contract by contract basis. It's quite possible to have two contracts running in parallel. One firmly outside and the other inside. Most of the factors you mentioned might have been relevant to one contract but would be no defense for the others. At best they are minor flags that might tip a very borderline case.

    Does All of the above go out the window in the new world? Would not the agencies and clients Have to pay attention to that?
    No. The status is determined by the client (or whoever depending on the situation, but not you) and once that is determined, lets say inside, then your business is irrelevant as you can't use it. It's on the role, not what your business does.
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    Grief.

    This becoming more and more depressing by the minute.

    Next they will turn around and say that buying property and renting it out is now No longer a viable Pension option and all landlords will have to give their investments to the undeserving.

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    Quote Originally Posted by simes View Post
    Grief.

    This becoming more and more depressing by the minute.

    Next they will turn around and say that buying property and renting it out is now No longer a viable Pension option and all landlords will have to give their investments to the undeserving.
    No. The landlords will have to give them to the deserving young.

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    Quote Originally Posted by simes View Post
    Grief.

    This becoming more and more depressing by the minute.

    Next they will turn around and say that buying property and renting it out is now No longer a viable Pension option and all landlords will have to give their investments to the undeserving.
    How is that even related? But just to cheer you up landlords get clobbered every year and are a very easy target so expect more of the same over the next few years.

    Oh.. and for Simes and everyone else that's way behind the times. None of this is new. It's been in place in the Public Sector quite awhile now.

    Maybe someone should update TF's sticky and make it generic to cover both so we don't have to go over this ad infinitum?
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