You may want to keep your limited company open after April 2020 – even if you are inside IR35
Posted on 29th October 2019 at 12:29
The majority of tax-savvy contractors carry out their engagements via a limited company as it is normally the most tax efficient way to operate as a freelancer working for an end client. Over the past few months however, the government’s announcement that they will be reforming off-payroll tax working rules from April 2020 has left many contractors wondering if contracting via their limited company – also known as a personal service company or PSC – is still going to be the most beneficial way for them to operate.
HMRC released its draft legislation for IR35 Private Sector change from April 2020 earlier this year, which was met with a high level of confusion and worry about how it might affect current contractors. The team at Effective Accounting has been preparing for this for several months, and we’ve been looking at all the options available to you so that you can continue working with the least amount of disruption to your business as possible.
A quick reminder: what do the IR35 legislation changes mean for contractors?
The key points to take from the draft legislation are as follows:
From April 2020, private sector clients will be responsible for checking contractors’ off-payroll (IR35) status;
To assess contractors’ IR35 status, clients will have to complete a status determination, which will ensure that there are no blanket assessments placing contractors inside IR35. Clients will still be able to insist that their contractors go on the payroll;
If a contractor disputes their IR35 status as assessed by their client, they will have to appeal to the client directly;
Small companies remain exempt from these new rules – only medium and large companies will be affected. (This means that if a contractor works for a small company, it will not be affected).
As mentioned, if you are already complying with the existing rules, then you should feel minimal impact from the new legislation. The new rules are targeted at those who are not complying with the current rules.
The full draft legislation can be found here.
What happens if you’re ‘caught’ by IR35?
If you’re deemed as being outside IR35, then you’re good to carry on as you were – you won’t have to do anything. Happy days! If you’re caught by IR35 however, this means the fee-payer (the end client) is landed with the responsibility of deducting tax and NI as appropriate from your invoice before they pay you. Ultimately, this means less money for you to take home, which isn’t so good.
Many contractors have been led to believe that if they are deemed inside IR35, then there’s no point continuing to work via their limited company. However, it actually is more complex than that.
There are still some benefits associated with keeping your limited company open - so read on to find out...
So what are the benefits to keeping your limited company status if found to be inside IR35?
First and foremost, being caught inside IR35 doesn’t affect the fact that you are still a limited company director. As such, you are able to make decisions that benefit your business in the long run. You’ll still be able to take on other contracts and benefit from the tax savings, as long as you are outside IR35 with them of course.
Furthermore, when working via a limited company, your personal liability is limited meaning if something goes wrong with your work and you find yourself in a legal dispute, your personal assets such as any property you own, and high-value items such as your car and any personal finances are safe as long as they’re personally owned by you.
If you choose to work via an umbrella company, you’re unlikely to be able to negotiate rates, payment and working terms. If you work via your limited company, however, you’re 100% in control of how you work and how much you charge for your services. You may actually be worse off working via an umbrella company for contracts in which you’re deemed to be outside IR35. Even if one of your contracts places you inside IR35, you can continue to claim legitimate business expenses on contracts where you’re safely working outside IR35.
Talking of expenses, you should note that if you are working on a contract in which you’re placed inside IR35, the expenses you can actually claim for are limited. If you work through your limited company, however, you are entitled to claim a 5% expense allowance to make up for the costs of running a limited company. There are also significant tax benefits related to paying into a pension through your limited company, as payments are deemed to be a legitimate business expense, which can reduce your corporation tax.
While not an outright monetary benefit, working via a limited company can help increase your professional reputation owing to the prestige associated with the status of limited company director. This can be reason enough for some contractors to continue to work via their limited company!
Whatever you choose to do, the most important thing is to remain informed and up to date. Do not hesitate to get in touch with Nicola if you are in any way confused, worried or concerned about the IR35 legislation changes, or simply if you have any questions.
Don’t leave it too late to prepare for IR35 private sector changes!
To support you through the upcoming changes happening in April 2020, we have put together an IR35 Private Sector: 5-Step Action Pack, which includes:
Full written IR35 Contract Review;
30-minute debrief call with Nicola to discuss the outcome of the IR35 Contract Review and its impact on you and your limited company;
Communications Pack including email and letter templates to send to your client to get your communications started, and in the event that you need to appeal;
30-minute call to discuss your very own action plan.
We are bundling all this together for our clients for just £297 +VAT.
Learn more in this free guide we've created for you, here.
Don't wait for your client to come to you.
Be proactive, take the initiative and get planning for April 2020!
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
Share this post: