It may be the case that you have been informed by your end hirer or agency that your assignment, which up to now you have deemed as outside IR35, is going to be inside IR35 once the private sector off-payroll reforms come into effect. What this means is that you will no longer have access to the tax benefits afforded to limited company contractors. Although this news might not be welcomed, it is certainly not a reason to panic; neither does it have to be the end of your contracting career. What you should consider, however, are your options.
One concern on the minds of many contractors is whether past contracts with the same end hirer are going to be at risk of investigation. HMRC have promised that they will not take any retrospective action on those assignments which were deemed outside IR35 prior to April and then deemed as inside once the changes are introduced, unless they suspect fraudulent or criminal activity. So you can choose to continue with the assignment and work inside IR35. This effectively means that you will be ‘employed for tax purposes’ and therefore taxed in largely the same way as an employee would be.
There are alternatives to continuing inside of IR35: you can either, become a permanent employee of the client if that is an option; operate through an umbrella company, or move on to greener pastures and look for outside IR35 assignments elsewhere- those will still exist! What is important is to make decisions that are best for you in the long term, not simply winding up your limited company and throwing in the towel. The good news is that you do not have to make these decisions alone. Clearsky is here to help guide you on your best next steps. We can look after all your payroll, accounting, taxation and financial affairs, whether your contract is inside or outside IR35. We will look at each of these options in turn.
You may have heard the term umbrella company banded around within the contracting community - what though does that actually mean? An umbrella company will act as your employer during the period of contracting inside IR35. They will ensure that you are paid a salary in line with the terms of that contract with your agency or end hirer, and make the necessary deductions and payment of PAYE and NIC. With the right umbrella company, it can be a stress and hassle free way of getting paid whilst you contract. Within our group, we have the UK’s leading umbrella provider, called Parasol, who can act for you. With Parasol, you will get all the benefits of regular of employment, such as a workplace pension, holiday pay and maternity / paternity pay, amongst other employee benefits, whilst still retaining all the freedom of contracting. If an umbrella company is required, or it sounds like the right solution for you, just let your personal accountant know and they’ll arrange for one of our advisors to get in touch to complete a quick and easy sign up.
What about your existing Personal Service Limited Company (“PSC”)?
So, if you are told your contract is going to be inside IR35 and decide to choose the benefits of contracting through Parasol, what about the existing PSC you are currently trading through? Our vast experience from helping thousands of contractors through the same reforms in the public sector in 2017 suggests that over time, the interpretation of the terms and conditions of individual contracts that determine whether a contractor falls inside or outside of the IR35 legislation are more carefully considered on a case by case basis and there is a shift away from blanket bans or assessments. This is a consequence of end hirers becoming more familiar with the IR35 legislation and realising that engaging limited company contractors on an outside of IR35 basis is perfectly legal and possible with the right support and guidance, and feeling the commercial impact of not having the same level of access to a flexible contractor workforce. It is possible that your end hirer might view your existing contract as inside IR35 now, and reconsider your terms of engagement at some point in the future. It is important, therefore, to consider now whether to keep your PSC trading, going dormant or closing the company down.
You can keep your PSC open (and trading) while being inside IR35, even if your payments are dealt with through Parasol. Your Personal Accountant will continue to support all your PSC needs, just as they do now. There are a number of disadvantages to closing your company down simply because you are deemed inside IR35, particularly if you need to start trading through it again as the IR35 market, inevitably, softens. There will be loss of Entrepreneurs Relief (Capital Gains relief on the funds you extract on closure) if you have been trading for less than two years. Entrepreneurs relief will also, potentially, be lost if you start trading through a new PSC within two years of closure as a result of legislation introduced in the Finance Act 2016. In addition, there will be a cost to close the company down and the hassle of forming another company if needed in the future. There is also a risk you will lose the right to trade through your current company name, if another company is registered in the meantime with the same name.
You can also keep your PSC company open, but not trade through the company (“dormancy”). The advantage is you have none of the disadvantages of closing and we offer a reduced monthly fee to maintain the accounting and filing requirements of a dormant company for you. The company sits in a dormant state for as long as you need, until you decide you want (and can) start trading through it again, or you are certain you will not need it and decide to close the company.
We can undertake an IR35 review of your contract by our team of qualified lawyers and IR35 specialists. A thorough review of your contract and working practices is undertaken and a written statement provided. This a great way to demonstrate your current position on IR35 to any agency or end hirer on the back of an expert opinion. Your agency/end hirer may have their own internal procedure but this can only help to reinforce your position.
So, whether your contract is deemed to be inside or outside of IR35, we are here to support any of you accounting or taxation needs. If you would like us to conduct an IR35 review of your contract, please let your ClearSky accountant know and we will happily undertake one for you.
Similarly, if you would like us to speak to your agency or end hirer about your IR35 status, or help them to understand how you can continue to operate on an outside of IR35 basis, we have the UK’s leading IR35 consultancy team on hand to assist. Again, just let your ClearSky accountant know and our IR35 team of specialists will be happy to get in touch with them to offer our support.
We have been helping contractors, agencies and end hirers with the IR35 legislation since its introduction in 2000. So, when it comes to IR35, or anything to do with contracting, whether you continue to contract through your PSC, or utilise the benefits of Parasol, we are with you all the way!
Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis. You can read more about this here.