Can IR35 Contractors Still Work Through A Limited Company?
The government recently postpone the changes that will be implemented on IR35 or off-payroll working rules until April 2021. Because of this, a lot of contractors running Personal Service Companies are forced to review their options. Some decided to move into direct employment as well as PAYE. While others opted to work through an Umbrella Company on temporary tasks, or even return to being a Sole Trader.
Even though these solutions provide an easier way of paying employment taxes, but most often it could also result in closing down your limited company. Nevertheless, there are still other options. It is possible that you can still work through a limited company regardless if your contract is still considered to be part of IR35.
Keep in mind that you must make sure that you pay the exact PAYE tax and National Insurance (NI) for all the contracts considered to be part of IR35. This is because, on the part of HMRC, they will always consider you as an employee. Although it is possible that this can be accomplished through your limited company.
Sometimes a contractor works on several contracts and only one of them is considered as part of IR35. Or maybe the contract that is part of IR35 will only last for a short period of time and the contractor anticipates to work on contracts which are not considered as IR35 in the future.
Nevertheless, you also need to consider that even if the government announced a postponement, IR35 rules are still going to be changed from April 2021. When these modifications are implemented, the one who decides your employment status will be your end client, instead of your Personal Service Company.
Work On Mixed Assignments
Take note that IR35 status will depend on every individual assignment, rather than on the Personal Service Company (PSC). Therefore, if you are working on a variety of assignments that includes a few “inside IR35 and a few “outside IR35”, then you have to ensure that the right procedures are used. As what we have discussed above, for the assignments considered “inside IR35,” you could either use the IR35 payroll through your limited company where the appropriate deductions are made and employment taxes are paid to HMRC. Another option would be to work through an Umbrella company.
Presently, you can still continue to enjoy the benefits of operating your limited company, for instance, expenses allowance.
If you keep your limited company open, then you can enjoy the flexibility in the assignment that you have chosen. You can set up your own fees, at the same time, you can work on any contracts that you want regardless of its duration.
Another benefit of continuing to operate your limited company is that you can still claim 5% tax allowance until April 5, 2021. Here, we will explain how you can benefit from this.
Contractors who are working on contracts deemed as inside IR35 have to abide by the strict business expense rules. Usually, you cannot claim things such as regular travel to and from work or perhaps for subsistence. This will apply if your contract with an end client is considered as part of IR35. With regards to your tax status, it will be similar to the employees of the end client.
HMRC acknowledges the expenses that you have incurred in operating your limited company. Hence, you are presently permitted to compute the employment tax that you need to pay based on 95% of the amount your company collects from your contracts that are deemed as inside IR35.
Nevertheless, you also need to understand that this allowance will not apply to contracts that are considered inside IR35 by public sector clients.
Here Is An Example
John is a contractor who works through his own Personal Service Company. He chooses to take a contract with a private sector client. The contract is worth £50,000 and it will end in March 2020. This amount will be paid by the end client to John’s company. John evaluated the contract and decided that it is inside IR35. Therefore, he is aware that he has to make payments for employment taxes on the income of £50,000.
It has various effects on John’s personal tax as well as on his company accounts.
This is John’s deemed employment payment computation. Income is £50,000, which is the amount paid by the end client to John’s company. This amount will be deducted by 5% allowance or £2,500, which is the allowance or expense of operating a limited company. Hence, the gross deemed payment would be £47,500, which is the amount that will be used in computing tax liabilities. Another deduction is the Employers NIC which is equivalent to £4,713 this amount will be paid by John’s company to HMRC. On the overall, the net deemed payment will be £42,787. Therefore, this is John’s gross salary and it will still be subject to employee national insurance contribution and income tax. Also, he must include the net deemed payment amount of £42,787 on his Self-Assessment since this is his employment income.
Company Accounts And Corporation Tax
The amount that the end client paid to John’s company is £50,000. This amount will be deducted by several expenses including director salary which is £42,787, this is the salary being paid to John by his limited company. Another deduction is the employer’s NIC which is £4,713, this is the amount that John’s limited company will pay to HMRC. Hence, the profit obtained before tax is £2,500, which is equivalent to the 5% allowance on the engagement income payment.
In case the company does not have any other business expenses, then the profit on this particular contract is £2,500. Consequently, this amount will be taxed accordingly based on the current Corporation Tax rate.
How Does The 5% Allowance Work?
Since the allowance is considered as part of the company’s taxable profit, then it will stay within its retained profits until such time that it will be given to shareholders. On a yearly basis, this amount can be used for covering regular business expenses including accountancy fees, expenses of running payroll, marketing and promotional costs for your limited company. In case you don’t have any business expenses, then you are required to pay corporation tax on this amount.
What Does The Future Hold For IR35?
Based on the government’s decision, the changes in the off-payroll working rules in the public sector will be implemented on the private sector assignments from April 6, 2021.