Accountants Birmingham Freelancers and Contractors Rely On: IR35 and Expenses Explained

29 Oct

Working for yourself in Birmingham gives you freedom, but it also puts you in charge of tax rules that employees never have to think about. Two issues cause the most confusion for freelancers and contractors: whether IR35 applies to your contracts, and which expenses you can legitimately claim. Get either wrong and the cost can run into thousands of pounds.

Both areas have shifted in 2026. Here is what freelancers and contractors need to know, and why so many choose specialist accountants in Birmingham to keep them on the right side of HMRC.

What Is IR35?

IR35, also known as the off-payroll working rules, is designed to stop "disguised employment". If you work through your own limited company (a personal service company, or PSC) but would be treated as an employee if you were engaged directly, HMRC expects you to pay broadly the same income tax and National Insurance as an employee.

Being "inside IR35" means the rules apply to a contract and tax is due as though you were an employee. Being "outside IR35" means you're genuinely in business on your own account and can use your company's normal structure, typically a small salary plus dividends.

The important point is that IR35 looks at how you actually work, not just what your contract says. A well-written contract with working practices that tell a different story won't protect you.

Who Decides Your IR35 Status?

This depends on who you're working for:

Medium and large private sector clients, and most public sector bodies: the client decides your status and must give you a Status Determination Statement (SDS) explaining the decision and the reasons behind it.
Small clients: the responsibility sits with you as the contractor, and your PSC must assess each contract itself.

What Changed From April 2026

The definition of a "small" company for IR35 purposes has widened. From 6 April 2026, a client is small if it meets at least two of three tests:

Annual turnover of no more than £15 million
Balance sheet total of no more than £7.5 million
No more than 50 employees

Thousands of businesses that were previously treated as medium-sized now fall into the small category, which means the off-payroll rules no longer apply to them and the decision moves back to the contractor. The timing depends on the client's accounting periods, so it isn't always automatic. If you suspect a client has become small, you can ask them to confirm their size in writing, and they have 45 days to respond. If they don't, they're treated as not small and the off-payroll rules continue to apply.

There's also a separate change for anyone working through an umbrella company. From April 2026, new joint and several liability rules mean unpaid PAYE in an umbrella supply chain can be pursued from agencies and end clients, which has made due diligence on umbrella providers far more important.

The Main Factors in an IR35 Assessment

Whether a contract is inside or outside IR35 comes down to the reality of the working relationship. The key factors include:

Substitution. Can you genuinely send someone else to do the work, and does the client accept that in practice? A real right of substitution points towards self-employment.
Control. Does the client dictate how, when and where you work, or do you decide how the outcome is delivered?
Mutuality of obligation. Is the client obliged to offer work and are you obliged to accept it, or is each engagement a standalone project?
Financial risk. Do you carry risk, such as fixing errors at your own cost or working to a fixed price?
Equipment and tools. Do you supply your own equipment and software?
Part and parcel of the organisation. Are you integrated into the client's team like an employee, with line managers, appraisals and company benefits?

HMRC offers an online tool called CEST to help assess status, but it doesn't always give a clear answer, and HMRC only stands by its result if you've entered accurate information. Many contractors get a professional contract review before they sign.

What Happens If a Contract Is Inside IR35?

If you're inside IR35 under the off-payroll rules, the fee payer, which is the client or the agency paying your company, must deduct income tax and employee National Insurance from the payment, and pay employer National Insurance on top, before it reaches your company. The rest is paid to you as a deemed employment payment.

For many contractors, an inside IR35 contract means a noticeably lower take-home pay, so it's worth understanding before you accept the role. Some contractors negotiate a higher day rate to compensate, move to an umbrella company, or look for outside IR35 alternatives. A Birmingham accountant can model the numbers so you can compare offers on a like-for-like basis.

Why Getting IR35 Wrong Is Costly

If HMRC successfully challenges a contract you treated as outside IR35, you can face a bill for underpaid income tax and National Insurance, plus interest and penalties. Historic enquiries can go back several years. Prevention is much cheaper than defence, which is why contractors often combine a careful contract review, sensible working practices and, for some, IR35 insurance.

Expenses Explained: What Freelancers and Contractors Can Claim

Your tax position depends on how you operate. Limited company contractors outside IR35 can claim a wide range of business expenses against company profits, while sole trader freelancers claim them against their trading income. Inside IR35, the options narrow considerably.

Common allowable expenses

Accountancy fees and professional subscriptions that relate to your work
Business insurance, including professional indemnity and public liability
Equipment and software used for your work, such as laptops, monitors and licences, often relievable through capital allowances
Training that maintains or updates skills you already use in your business
Marketing and website costs
Bank charges and business banking fees
Employer pension contributions made by your company, which are usually deductible
Phone and internet costs to the extent they relate to business use

Travel

Travel expenses are one of the most misunderstood areas. In general, travel to a genuine temporary workplace can be claimed, while travel to a permanent workplace is treated as ordinary commuting and cannot. A workplace is usually considered temporary if you expect to attend it for less than 24 months, and it's not a permanent base. Mileage can be claimed at HMRC's approved rates when you use your own car for business, currently 45p per mile for the first 10,000 miles in a tax year and 25p after that.

Subsistence

Reasonable meal and accommodation costs while travelling to a temporary workplace may be claimable, but receipts and clear records are essential. Day-to-day lunches near your normal place of work generally aren't allowable.

Working from home

Contractors working from home can claim a reasonable portion of household costs or use the simplified flat rate. Which is better depends on your circumstances, and the records you keep matter either way.

Expenses that are not allowable

HMRC regularly challenges claims for personal clothing, everyday commuting, client entertainment (which is disallowed for corporation tax), fines and penalties, and anything with a clear personal element. Keeping business and personal spending separate through a dedicated business account makes claims far easier to defend.

Paying Yourself Tax-Efficiently in 2026/27

For limited company contractors outside IR35, most owners pay themselves a modest salary and take the rest as dividends. Dividend tax rates went up on 6 April 2026: the basic rate is now 10.75% and the higher rate 35.75%, with the additional rate unchanged at 39.35%. The first £500 of dividends remains tax-free. Alongside corporation tax, which is 19% on profits up to £50,000 and 25% above £250,000 with marginal relief in between, the balance between salary, dividends and employer pension contributions has changed for many contractors. It's worth reviewing every year rather than leaving it on autopilot.

Why Contractors Choose Specialist Accountants in Birmingham

Birmingham's contractor and freelance community covers IT and digital, engineering and construction, finance, healthcare and the creative industries, and each comes with its own mix of contracts, agencies and tax questions. A good accountant Birmingham contractors trust will:

Review contracts and working practices for IR35 risk before you sign
Explain your options if a contract lands inside IR35
Claim every legitimate expense and keep your records HMRC-ready
Plan your salary, dividends and pension contributions to keep tax down
Handle your company's accounts, corporation tax and confirmation statement on time
Keep you informed when the rules change, as they did this April

Work With Birmingham Accountants Who Understand Contractors

Cheylesmore Accountants supports freelancers, contractors and limited company directors with fixed-fee packages covering accounts, tax returns, bookkeeping, payroll and ongoing advice. Fees start from £150 ex VAT per month for limited companies, with no hidden extras.

If you're looking for accountants in Birmingham who can sort out your IR35 position and make sure your expenses are claimed properly, book a free 15-minute consultation to talk through your contracts and your numbers.

Call 0121 369 1055 or book a discovery call to get started.

Tax rules and rates are correct for 2026/27 but can change, and individual circumstances differ. IR35 status depends on the facts of each engagement, so take professional advice before relying on any assessment.