Does IR35 apply to Limited Companies? : The Ultimate Guide
Does IR35 apply to limited companies or not? The complexities surrounding IR35 still confuse limited company contractors. Some people are under the impression that the new regulations have made it impossible for contractors to work through their own company. However, it is not the case. This blog post will discuss the IR35 legislation and how it affects Limited company contractors. We will also provide some tips on ensuring that you remain within the law and continue to work through your own company.
But before we proceed further, let’s understand what IR35 is.
What is IR35?
IR35 is a set of rules that HMRC first introduced in 1999 and implemented in April 2000 to clamp down on what they perceived to be tax avoidance by workers who were supplying their services to clients via intermediaries (usually personal service companies).
The rules are complex, but the main effect of IR35 is to treat payments made to personal service companies as if they were paid directly to the worker for tax purposes. It means that the worker would pay income tax and National Insurance contributions on those payments at the same rate as if they had been employed directly by the client.
HMRC has always maintained that IR35 catches most workers who supply their services via personal service companies. However, there has been much debate over whether the rules are fair and achieve their intended purpose.
IR35 New Reforms
The IR35 legislation has been in the news a lot recently, as the government has proposed changes that will affect how limited company contractors are taxed. Under the new rules, which are due to come into effect in April 2020, clients will be responsible for determining the worker’s employment status who supply their services through personal service companies. If a worker is inside IR35, the client will be required to deduct income tax and National Insurance (NI) contributions from any payments made to the worker’s company.
However, some contractors who were previously judged as ‘outside IR35’ may be reconsidered ‘inside IR35’. But what does this mean for contractors? And can they continue working through a limited company? Let us explain to you:
To decide whether a worker is inside or outside of IR35, clients will need to assess the working relationship between the contractor and the company. This assessment will consider factors such as control, supervision, and mutuality of obligation.
If the client determines that a contractor is inside IR35, this means:
- The worker will be treated as an employee of the company for tax purposes. The client will be required to deduct income tax and National Insurance (NI) contributions from any payments made to the contractor’s company.
- If a client finds out that a contractor is outside IR35, the worker will continue to be treated as self-employed for tax purposes. The client will not be required to deduct income tax and National Insurance contributions from any payments made to the contractor’s company.
- However, it is crucial to note that whether a worker is inside or outside of IR35 is based on the specific working relationship between the contractor and the company.
There are several compelling reasons to retain an inside IR35 contractor, despite the inevitable that they will earn less money at month’s end.
Working outside IR35 means that you are considered operating outside of the rules if found. It is an easier option than having your real income taxed at higher rates when working under IR35 conditions. However, nothing changes; it’s still possible for contractors in either private or public sector jobs to pay themselves salaries while drawing dividends from their companies’ funds with no taxes owed on any profits made by these payments (or both).
Is Limited Company Still the Best Option?
Contracting via Personal Service Company (or Ltd) has been the best option for many contractors since 6 April 2021, when their reform made it more difficult to abuse off-payroll tax rules.
The decision to become a contractor or work through an umbrella company comes down primarily between two options. The first is that you can choose not to have any permanent employment; this means being independent and having your business ventures.
A choice would be joining an umbrella company. It is an intermediary between you and your recruitment agency (or end client). It allows self-employed contractors to join others as an employee instead of setting up their own limited companies.
However, Instituting an ‘inside IR35 decision’ is unnecessary for business success. It might be the situation that some aspects of your company’s operations were initially brought to Ltd., but, fortunately, it is still possible to continue working through this type rigorously and efficiently with all potential benefits intact.
Also, Contractors want to be considered individuals, not just the company they work for. The limited liability status of being an individual contractor makes them so attractive and desirable compared to other business forms like partnerships.
Reasons for Retaining a Limited Company:
You might want to retain your limited company for the following reasons, even if the new IR35 rules catch you.
1: Your Limited Company Gives You More Control Over Your Finances.
As a contractor, you will often be paid through an umbrella company. It can make it challenging to keep track of your finances and budget effectively. If you choose to work through your own limited company, you will have greater control over your finances and will be able to manage your money more effectively.
2: Your Limited Company Gives you More Flexibility.
Working through your own limited company provides you more flexibility regarding how you work and when you work. You will be able to take on contracts that suit your lifestyle and work around your commitments.
3: Your Limited Company can Help you Save Money on Taxes.
If the new IR35 rules catch you, you will still be able to claim certain expenses through your limited company. It could include things like travel and subsistence expenses, which can help to reduce your overall tax bill.
4: Opportunities for Future Pension
If you are a contractor and caught by the new IR35 rules, you will still be able to use your limited company to provide for your retirement. You can do this by setting up a pension scheme and making contributions through your company. It could help you save money on taxes in the long term and provide for yourself in retirement.
5: Your Limited Company Gives you Peace of Mind
Working via your own limited company can give you peace of mind as a contractor. It is because you will have control over your work and finances, and you will be able to choose contracts that suit your lifestyle. You will also be able to save for your retirement and plan for your financial future
6: Advantageous for Additional Business Interests
Another advantage of having a limited company is that it can be advantageous if the contractor has additional business interests. The little company can act as a ‘buffer’ between these interests, which can help protect the individual’s finances.
7: Limited Liability
A further advantage of having a limited company is that it provides the contractor with limited liability. It means that the individual is not personally liable for any debts or liabilities incurred by the business. It can provide peace of mind and financial security if something goes wrong.
You might want to retain your limited company, even if the new IR35 rules catch you. These include greater control over your finances, more flexibility in terms of work, and opportunities for pension planning. You may also find that a limited company gives you peace of mind and protection if something goes wrong. However, it is simply the way of life for some, while others will choose this freedom over any other type of structure to maximise their take-home pay.
If you have any questions about how IR35 will affect you, please contact Clear House Accountants today. We would be delighted to discuss your specific situation and provide advice on the best course of action for you.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 13 years of experience in practice across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. This dexterity led him to be Enterprise Nation’s Top 50 Advisors. Jibran recognised the need to manage the innovative disruptions sustainably early on and shaped Clear House Accountants not just to be compliance specialists but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
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