Contractors' Questions: Is my tax set-up IR35-friendly?
Contractor's Question: I last contracted in 2000, before IR35 really started to bite. I'm thinking of contracting again, but do not wish to have a risky tax position. If I simply take a salary equal to my revenue, minus expenses and simply pay the appropriate tax, would the taxman be likely to accept this? In the said- arrangement, I would simply treat the revenue as a salary. Also, does the National Insurance issue for the client company still exist?
Expert's Answer: The starting point has to be your IR35 status even if you decide to take everything out as salary! This is because you (or rather your company but this is usually one and the same) has to consider your IR35 status in order to complete your tax and employer returns properly.
Considering your status also protects against penalties from HM Revenue & Customs as you will be able to demonstrate that you have taken reasonable care over this issue.
If you decide that you are inside IR35, then you will have to complete a deemed payment calculation at the end of the year where you will be allowed a 5% deduction with the rest, subject to PAYE and NIC.
If you decide you are outside IR35, your level of salary is down to you. Your proposal of paying everything out in salary means that even if you get your IR35 status wrong you will not be facing a large tax/NIC bill but could incur HMRC penalties for completing incorrect tax returns. Your strategy sounds fairly low risk, providing you do decide on your IR35 status first.
Finally, I think your reference to the NI issue for the client company was a possible scenario put forward before IR35, as we know, it was introduced - pre April 2000. Unfortunately all liabilities for tax and NIC
fall to you.
The expert was Kate Cottrell, co-founder of IR35 advisory Bauer & Cottrell.