Expenses when inside IR35

When calculating the ‘deemed salary’, certain expenses can be deducted from your contract

income. To be clear, the following expenses have been mentioned by HMRC in various

consultations and FAQ publications:

Travelling (and other expenses deductible under Section 336 ITEPA).

Employer contributions to approved pension schemes which attract tax relief in the normal way.

Gross salary paid, plus any employer NI contributions on both the salary paid and any deemed

    payments.

5% of the gross income from relevant engagements to cover running costs.

Any other expenses which do not fall within S336 ITEPA, but have another statutory route

   for deduction, such as professional subscriptions and professional indemnity or personal

   liability insurance.

Travelling

You are entitled to tax relief on the full cost of any travelling involved in your contract, or any travelling

that you have to do to attend a place at which you are to perform your duties, excluding the costs of

ordinary commuting and private travel. For the purposes of contractors the following logic applies:

Workplace - travel from home to your permanent workplace is not tax deductible, this is part of

the ‘ordinary commuting’ cost. For many employees their permanent workplace is obvious, and

any occasional journeys to other locations will clearly be an allowable expense. However, in the

contracting business, which involves travel to the site of the client, care is needed not to fall foul of

the rules. The guidance indicates that a ‘permanent workplace’ is to be interpreted as follows:

“A place where an employee works is a permanent workplace if he/she attends it regularly for

the performance of the duties of the employment.” With this definition and the concept of ‘regular

attendance’, most contract workers would be in difficulty, but they are excused by the exclusion

of temporary workplaces.

Temporary workplace - “A workplace will not be a permanent workplace if it is a temporary

workplace. A temporary workplace is somewhere the employee goes only to perform a task of

limited duration or for a temporary purpose.”

Clearly, this will normally exclude your client’s site, as you attend it for a fixed period only and then

the contract ends. This means that you are performing a task of limited duration there and travel to

the site will be allowable. However, mindful of possible abuses, HMRC has introduced a limitation to

the temporary workplace rule, as follows:

“A workplace cannot ever be a temporary workplace if the employee attends it in the course of a

period of continuous work which lasts, or is likely to last, more than 24 months.”

A ‘period of continuous work’ is a period of work, throughout which the duties of the employment

are performed to a significant extent at that place. For this purpose, ‘significant extent’ will be

interpreted as 40% or more of the employee’s working time spent at that place. This limits your

deductions in respect of travelling expenses when you renew a contract repeatedly. Once you have

been travelling to the same client’s premises for nearly two years, and the next contract renewal

will take you over the two year point, you will no longer be permitted to claim with effect from the

renewal date. Note that it is at the point that the contract is expected to exceed 24 months that the

deduction is lost, not at the point at which the 24 months is exceeded.

Where you decide not to renew immediately at the end of, say, 22 months’ work, be aware that the

24 month period continues to run (that is any period of 24 months). If you return to the same client

site within about 15 months you should not claim for your travelling expenses. This is because 60%

of 24 months is 14.4 months, so this is the length of the gap needed to overcome the ‘40% in 24

months’ principle.

Pensions

Pension contributions form an extremely important part of remuneration planning when inside IR35.

Not only are the contributions allowable for tax purposes, they can also be paid before paying the

new ‘deemed salary’, meaning that both employee’s and employer’s NI is saved. As a contractor who

is inside IR35, you not only save on the income tax that you would have normally paid, but you also

avoid the employers and employees national insurance contributions. The amount of tax relief can be

as much as 45%, meaning that for each £100 invested you pay £55 and HMRC pays the rest.

The 5% deduction

This allowance, being 5% of the total income from relevant engagements, is intended to cover all of

the expenses of running the company, including accountancy fees and the Companies House filing

fee. In the ‘deemed salary’ calculation there is no need for the intermediary to show how, and where,

the expenditure has been laid out or even whether it has or not. It is sufficient to deduct the 5% in the

calculation.

Where, in reality, the company bears more or less than the amounts allowed, this may generate

a profit or a loss for corporation tax purposes, so there is still a purpose in recording the actual

expenditure incurred by the company.

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