Is it Still Possible for IR35 Contractors to Use a Limited Company?
Contractors running Personal Services Companies will now have to consider their options once the changes to the off-payroll working rules, also known as IR35, come into effect in April 2021. Many have opted to move into direct employment, and others have decided to work via an IR35 umbrella company for temporary projects while also becoming a Sole Trader.
When it comes to paying employment taxes, these solutions simplify this, but they will mean that contractors have to close their limited company although other options are available.
Even if your contract is considered inside IR35, it is possible to continue working through a limited company. H however, you will be required to make sure that you pay the right PAYE tax and National insurance for any contract that sits within IR35 as HMRC will consider you an employee. Despite this, it’s possible to do this through your limited company.
Companies will also take care of this for clients as their limited company accounting service will offer an IR35 payroll option. While there are plenty of reasons why a contractor working on a range of contracts might only be working on one inside IR35, or maybe a contract within IR35 is in place for a short period. In contrast, the contractor expects to work on contracts that are outside IR35 imminently.
While the government’s announcement has been delayed, it’s important to understand that the IR35 rules will change from April 2021. Once they come into force, if contractors are working for a small end client or business, it is down to them to determine the employment status instead of your Personal Service company.
Working on a Range of Assignments
The IR35 status is based on every assignment and not on the Personal Service Company. Therefore, if you are working on various assignments, of which some are inside IR35, and others are outside IR35, you’ll need to ensure that you implement the correct processes. This means that you could run IR35 payroll for all of those assignments that are considered inside IR35, which means that your limited company will take care of ensuring the correct deductions are made and pays the relevant employment taxes to HMRC. In contrast, you could choose to operate through an umbrella company.
So, if assignments are deemed inside IR35, then the Public Service Company will need to take responsibility for identifying your employment status. However, if your project is considered inside IR35, then the end client will be required to identify your employment status and take responsibility for paying you, and this is often the case if your end client is an organisation in the public sector.
It is still possible to continue to take advantage of the benefits of operating a limited company, including your expenses allowance. If your limited company remains open, then you have the freedom to choose the work that you undertake. Therefore, you have the scope to set your own fees, and the contracts can be put in place for any length of time you wish.
An additional advantage of having a limited company is that up until the 5th April 2021, you can still take advantage of a 5% tax allowance. So, it’s important to understand how you can benefit from this.
There are strict rules in place for business expenses for those contractors who are working on contracts that are insider IR35. If your end client is considered to be inside IR35, then it’s usually not possible to claim for the likes of travel to and from work or subsistence. As a result, you will have the same tax status as the end client’s employees.
However, even while running a limited company, HMRC still understands that you will have expenses related to this. So, you have the ability to calculate employment tax based on 95% of the amount that your company receives from those contracts that are deemed inside IR35.
For those contracts deemed inside IR35 by public sector clients, you’ll need to understand that this allowance will not apply to these contracts.
The 5% Allowance – How Does This Work?
The allowance is considered part of the company’s taxable profit, which means that it will stay in it until it is shared between shareholders. Standard business expenses will cover accountancy fees, payroll costs, and marketing costs, but on an annual basis, the amount can cover these. If you don’t have any business expenses, you will be required to pay corporation tax on the amount.
How Does the Future Look for IR35
From the 6th April 2021, the government has decided that the off-payroll working rules in the public sector will be put in place for assignments completed in the private sector.
If you are looking to find out more about the upcoming IR35 changes, it is worth seeking professional advice. You can consider your options and whether you should continue to operate as a limited company or use an umbrella company. Making the right decision is vital, but getting to that point will require you to consider the situation and your options.