If you are caught by the off-payroll IR35 rules, you may decide that there is no point keeping your limited company active. However, this isn’t necessarily the case, as a leading accountant explains.
What happens if your contract is deemed to be inside IR35?
Last week, the Government published draft legislation for the April 2020 private sector off-payroll extension. Very little has changed from the initial proposals, despite a flood of responses to the recent consultation. And although time remains for further changes to be made, past form suggests that this is unlikely.
Therefore, after April 2020, if you have a private sector client (which isn’t defined as a small organisation), then the client will be responsible for determining whether or not your contract is inside IR35 or not. The client will share the status determination statement with other parties in the supply chain – and is expected to take reasonable care in making this decision. If you disagree with this decision, you can complain to your client, however there is no independent right of appeal.
The fee-payer will be responsible for deducting income tax and NICs from your contract income. And if they don’t pay these liabilities, there is a ‘transfer of debt’ provision in the legislation – which means another party in the supply chain may end up facing any unpaid tax bills. The threat of this liability, together with the many other difficulties with understanding how to operate the new rules is thought to be behind the practice of blanket inside-IR35 determinations which have plagued public sector contractors following the April 2017 rollout.
Read these guides for more practical advice:
- April 2020 Private sector IR35 reform – what next?
- What end-clients should do to prepare in advance of April 2020.
- What contractors can do to prepare for the private sector changes
Should you keep your limited company if caught by the off-payroll rules?
We asked Chris James, head of accounting at JSA, why you may consider working via your limited company, even if your current contract falls within the scope of the new legislation.
Mixed status of your contracts
For some contractors, it may be more practical to work this way, especially if they are doing a mix of work where some contracts are inside IR35 and others are not. They would need to work out if they are better of remaining limited, but if at least 50% of income is coming from ‘outside IR35’ contracts then it will most likely be worth their while staying limited.
It will also depend on a contractor’s longer-term plans. If they are thinking of re-training to be able to undertake roles which would not be considered ‘caught’ by IR35 then it would make sense to keep the limited company. There is a cost when closing down a limited company, so if working inside IR35 is temporary, the short-term tax consequences would not be such a burden.
Too much uncertainty to make a decision
Another example of where a contractor might continue to use a limited company is where there is potential for the end user to change their mind about categorising a particular role as ‘inside IR35’.
The new rules will take time to bed-in, and different companies will have different interpretations of what the rules mean. If an end user decides that a particular role is inside IR35 but there is the chance that they might change their mind, contractors are probably better of ‘sitting tight’.
Keep hold of the limited company, accept the tax consequences for the short-term, review in a few months’ time if the situation isn’t getting resolved.
The final point relates to the kudos of having a limited company. Some contractors just like this way of working and will prefer not to change.
The important thing is that they should only do this as long as they are fully aware of what the tax consequences will be, and as long as they weigh up the advantages and disadvantages.
It’s definitely a good idea to get guidance from an accountant or expert who understands the rules and to get some calculations on the impact on take-home pay.