New IR35 rules – some guidance
Well the budget did not deliver for many of us and the new IR35 rules will be coming in from 6 April 2020. We have outlined some points about the new legislation below. If you have any questions, please give us a call or an email to arrange a call with Ron or Roshan.
The new off-payrolling regime in brief
Where a contractor’s personal service company (PSC) receives payments for work done by the contractor (you) from a non-small private sector client, the client must from 6 April 2020 determine whether or not the contractor would have been an employee if they had been hired directly, i.e. not via the contractor’s PSC. If the client determines that they would, then the contractor will be considered a deemed employee and the fees payable to the PSC will be subject to PAYE (with any VAT and expenses paid gross to the PSC).
What are your choices?
Generally, PSCs are (in many cases) automatically deemed to be inside of IR35 and thus being told that if they wish to continue contracting then they must go via an umbrella company. It is either this or the contract would cease from before 6 April 2020 and the contractor would have to go and find another contract (an outside of IR35 contract). From what we understand and have been told there are few outside IR35 contracts available in the market presently. Most of our clients have taken the umbrella contract as they effectively have no other choice and sometimes it is better the devil you know than the devil you don’t!
Having said that, many commentators are saying that slowly the market will respond to these changes and there will be outside of IR35 contracts available in the future (but no one will be able to tell you when). With that in mind, many of our clients are retaining their limited companies with the intention of getting an outside of IR35 contract in the future.
Some of our clients with large sums of money in their company bank accounts have even foregone taking an umbrella contract and are doing ‘nothing’ while the market responds to these changes. They are the lucky few!
Finally, some have taken permanent roles and we are in the process of closing their companies for them (see ‘Closing down the Company’ for more details).
What does contracting via umbrella company mean?
- If going via an umbrella, then this would mean that your PSC would no longer be invoicing your client and you would become an employee of the umbrella company. The umbrella company would hold the contract for you to work for your end client.
- You would cease to take a salary and dividend from your PSC. (see ‘What about my company?’)
- Once signed up with an umbrella company and becoming an employee of the umbrella you would send your timesheets to them.
- The umbrella company would raise invoices to your client and receive funds for the work you have performed.
- The funds received (excluding VAT) by the umbrella company less their fee and Employers National Insurance (roughly 12% of the funds received) is then processed as a gross salary with applicable deductions for Holiday Pay, PAYE (income tax) and Employees National Insurance.
- The net pay is then paid to you each month and the applicable taxes paid to HMRC by the umbrella company.
What about my limited company?
As already mentioned, some of our clients are retaining their limited company with a view that the market will respond to these changes and there will eventually be outside of IR35 contracts available.
We can effectively put your company in a ‘dormant’ state and reduce our fees accordingly. If you would like more information about this then please email Ron or Roshan on [email protected] or [email protected] to arrange a call.
Closing the company
In some instances, clients are choosing to close down their limited company. There are some options available here and it really depends on the funds left in the company as to how to close it down.
The starting point for closing is to produce a final set of accounts for the Company. This should be to the end of the month that the last invoice payment from contracting is received.
At the same time as doing this we would need to close the PAYE and VAT schemes and reconcile these to ensure that there are no further liabilities.
Once the final set of accounts have been approved by you and submitted to both Companies House then we will be able to close the company.
There are two methods of closing the company (Solvent Liquidation or Dissolution) and the method employed would depend on the level of funds left in the company. Ron or Roshan would be able to go into more detail on this over the phone or in a meeting but here are some details below.
If the PSC has over £25,000 of assets, then a solvent liquidation is a tax efficient option of closing the PSC. Any assets of the PSC (including residual cash) will be distributed to the shareholder(s) as a capital distribution meaning that a lower rate of tax can be obtained which currently stands at 20%. In addition, the shareholder(s) may qualify for entrepreneur’s relief which would lower that rate to 10% at current rates. A significant tax saving!
If the PSC has assets of less that £25,000 then a dissolution and strike off of the PSC may be an option of dealing with it in a simple and cost-effective manner.