With the introduction of the new IR35 legislation in UK, many contractors caught inside IR35 are going to pay more taxes.
The most popular tool for the calculation of the tax burden among contractors is this one:
Unfortunatelly, this tool seems to have a bug that makes taxes appear more terrible than they actually are. Could someone help me to understand what is wrong here?
Let's suppose the daily income, inside IR 35, is 500 pounds a day. Let's insert this and click "calculate", and we will get to this page:
Here, they state: "Avoiding IR35 would increase your income by £1,024" This seem so bad! That would be 12288 pounds a year that contractors would lose.
However, if we click on "Show the tax burdens for inside and outside IR35", we get to this other page:
Here, the story is different. They state: "Being caught by IR35 results in an extra tax burden of £ 6,788"
That's a big difference, as 6788 is lower than 12288. Then, which one of the 2 numbers is correct? what's the calculation error here? how should it be then?
I found the reason for this difference is that there are expenditures in the calculation that are hidden to the user. Different expenditures amount are used for inside and outside IR35 contractors and this is misleading.
Here are the default expenditures used for outside IR35:
See here: details outside IR35
Here are the default expenditures used for inside IR35:
Legitimate section 98 expenses £3,000 Allowable Expenses 5% £5,500
See here: details inside IR35
Now, the questions is: why 2 types of expenses for inside IR35? What's the difference between "legitimate section 98 expenses" and "allowable expenses"? Does it mean inside IR35 contractors can have more expenses? It's weird this tool doesn't allow me to change the "allowable expenses". Any expert on this?