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Agency Guide - Fact & Fiction - Contractors

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Mark Milligan of Crystal Umbrella provides an insight into the murky world of contractor taxation in the UK.

A contractor can choose to be "Outside IR35"

FICTION - A contractor's IR35 status is governed by their working practices and their employment contract. Both of these areas have to be fully assessed before determining what a contractor's IR35 status is.

Contractors receive the expenses claimed paid back in full from HMRC.

FICTION - HMRC do not re-pay or reimburse expenses in full; An Umbrella Company should reimburse appropriate expenses in full from the invoiced amount. What HMRC do allow is a contractor to claim tax relief on this expense. So for every £100 in expenses they would get £32 reimbursed. (Based on typical Tax and NIC rates)

Contractors can avoid IR35 simply by adjusting their employment contract.

FICTION - There is no such thing as an IR35 "proof" contract as all of the actual working arrangements are relevant. Many so-called IR35 "proof" or "friendly" contracts are drafted without consideration for the real situation or the requirements of clients and agencies. HMRC can also investigate actual working practises by requesting statements from the contractor's Client.

Freelance Contractors earn more than perm workers

FACT - The fees earned by contractors are always more than permanent employees. Provided a professional approach is taken in finding a contract, gaps between contracts can be avoided making the chance to earn considerably more money than in permanent employment more realistic. If the skill set is heavily in demand, then a contractor could at least double or even triple their current take home pay by contracting.

A Contractor will receive full holiday pay from their Umbrella Company

FACT - Holiday pay is a commitment usually paid by an employer to a full time member of staff. As a freelance worker, you do not receive this benefit, however, they will receive a higher basic rate of pay to compensate and the umbrella company will then pass this back to the worker.

Being a contractor will make it difficult to get finance / mortgages

FICTION - The difficulty lies in proving what their income actually is.

If a Contractor opts out of the European Work Time Directive, they are automatically "Outside IR35"

FICTION - Opting in or out of the Work Time Directive has nothing to do with the employment and IR35 status.

After 24 months at one contract, Contractor's can claim expenses again if they move Umbrella Companies

FICTION - Moving Umbrella Companies does not re-start the "24 Month Rule" this can only happen after a 6 month break in the contract or a complete change in temporary work place.

Contractor's can claim PC equipment back as an expense

FICTION - Hardware is no longer covered by HMRC as an allowable expense when "Inside IR35". The simple reason behind this is the expense has to be wholly and exclusively for the contract. Therefore they would have to hand back the hardware when the contract finished. If "Outside IR35" the guidelines are different.

Contractors should always collect receipts of claimed expenses

FACT - Any expense that a contractor claims tax relief on whether covered by a company's dispensation or not should be retained for their own records. Original receipts should never be sent to an umbrella company, if this is necessary however, it is highly advisable for contractors to keep a copy or ask for a copy in return.

Contractors pay both Employers and Employees National Insurance Contributions

FACT - If caught by IR35 then a contractor will pay full Employers and Employees NI on all their earnings since they are effectively forced to pay all the salary via PAYE. Whether they decide to join an umbrella scheme or form their own limited company makes no difference to NI payments, they still need to be paid.

Contractors can claim tax relief on temporary rented accommodation

FACT - They have a right to deduct expenses for a rented place to live near the contract work site if, and only if, they have a another house or flat as a principal place of residence elsewhere in the UK.

The basic rule is simple. Ordinary living expenses cannot be deducted from their taxes, that is food, clothing, travel to a regular place of work, etc. Suppose they were a permanent employee based in Leeds, and their employer asked if they could work in the London office for three months. The employer would pay for all travel, lodging, and for at least part of their food because they would be obliged to eat in restaurants more.

The same applies to a contractor. If they are obliged for valid work reasons to travel to a different work site, their travel, lodging, and food expenses become deductible. All related expenses can be deducted, including council tax, electricity, and everything else related to the move. That includes travel to the office from the temporary place of residence.

This rule applies to contractors who live in one city, and are working in another. It does not apply to a foreigner; for example, a contractor who has come to England from Australia, and takes up residence near work, that residence then becomes the principal residence as far as the UK tax authorities are concerned.

Mark Milligan works for Crystal Umbrella, recognised as one of the leading specialists in the UK for taxation support and advice. Crystal Umbrella was specifically set up to provide a more tailored and bespoke PAYE payment solution for UK contractors.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: ? by Stéfan

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