Steps for volunterily moving to 'Inside' IR35

[pauldee]

There's also the question as to why you'd want to go via your PSC if inside IR35. You're being taxed as an employee but have all the overheads of running a Ltd Company.

My assumption was that an umbrella would be more expensive than running a PSC. How much does an Umbrella cost on average?

I can see myself getting into the situation where I have to keep the PSC running in case I get an outside IR35 role in the future, an umbrella would be and extra overhead.

[Amanensia]

My assumption was that an umbrella would be more expensive than running a PSC. How much does an Umbrella cost on average?

I can see myself getting into the situation where I have to keep the PSC running in case I get an outside IR35 role in the future, an umbrella would be and extra overhead.

Setting up a new company is no particular hardship or expense. I wouldn't use that as a reason not to close the existing one.

Umbrellas are relatively cheap because it's easy. Money in, take a margin, run payroll. I've never used an umbrella myself (yet!) but it certainly appears to be quite a bit less than accountancy fees for a year. I suppose if you don't use an accountant then a company isn't really going to cost much to keep dormant.

[lucyclarityumbrella]

How much does an Umbrella cost on average?

Don’t base it on cost alone pick up the phone and talk to them to get a proper idea of who will be handling your cash [emoji6] but they can range from £15 per week to £30. HTHs

[pauldee]

Don’t base it on cost alone pick up the phone and talk to them to get a proper idea of who will be handling your cash [emoji6] but they can range from £15 per week to £30. HTHs

Right, so that's not a lot of money in the general scheme of things. And if you're paying PAYE on a decent day rate, then even combined with the umbrella company costs, you'll still be bringing home considerably more than an equivalent permie job.

So it begs the question: what's all the panic about? Why are we talking about the end of contracting?

[Amanensia]

It's not the end, but it's a big hit. A well-paid contractor running a company with no weirdly aggressive avoidance schemes - just the basics such as mostly dividend income and a spousal joint shareholder - could easily be losing an effective third of their income from the changes.

The problem, really, is that there's always been this dichotomy between employment and self-employment, without clear and unambiguous definitions of which is which. Any fundamental definition, which makes such a significant difference to outcomes, shouldn't require multiple tribunals and courts all overturning each other to try to work out which one applies. Draw clear lines somewhere - anywhere! - and let us get on with it. Even after the upcoming changes though this won't be the case - two diffferent clients with identical roles could easily classify them differently based on their attitude to risk.

[webberg]

I don't understand why being inside IR35 means you need to operate under an umbrella company? Why not just continue with your Ltd company and pay the extra tax?

If the client is mid/large, then they are obliged to make a determination.

If that determination is "inside", then the obligation to deduct tax from the payments rests with the fee payer or absent a fee payer, the client.

There is no mechanism for your Ltd to deduct tax as a replacement for the client/fee payer.

(Why would you keep your limited in the chain anyway if you are inside?)

[webberg]

Why would the agents be on the hook, it's the end client that makes the decision? And what's the risk if you are being declared inside IR35 anyway?

The party "on the hook" is the fee payer.

In the event that fee payer fails, the liability moves back up/down the chain to the client.

The risk of being inside IR35? See threads and posts by the thousand here.

[webberg]

Agree!!! His example was terrible and pretty sure 99% of contractors with ltd won't do anything close to that!

Why was my example "terrible"?

I ask in a genuine attempt to make it better, more realistic.

I confess that I'm struggling with a model that says the PSC earns money that the individual does not need immediately but rather assumes that the following year there is no income, thus freeing up more PA/basic rate bands.

I'm not sure how realistic that is.

My model assumed that the contractor is working pretty much continuously without long breaks.

If that assumption is wrong, then I'm happy to amend.

[webberg]

Right, so that's not a lot of money in the general scheme of things. And if you're paying PAYE on a decent day rate, then even combined with the umbrella company costs, you'll still be bringing home considerably more than an equivalent permie job.

So it begs the question: what's all the panic about? Why are we talking about the end of contracting?

The real kicker I think comes in NIC.

A client employing somebody on £80,000 a year (£350 a day equiv rate for this example), actually pays around £90,000 out of funds because of NIC.

If that client pays a day rate of £350, then presently you pay NIC but at a much lower rate assuming that you are savvy with divs etc.

Post April, if you are inside, then NIC (in this example £10k) is due.

If your £350 a day is paid to an umbrella, they will deduct NIC (around £8500 due to netting down) and you will receive £350, less tax, less em'ee NIC, less em'er NIC as above.

In effect a hit of £8,500 at least.

You could therefore go to the client and say that your day rate needs to increase to compensate.

Whether you are successful or not can depend on many factors.

[Hobosapien]

Why was my example "terrible"?

I ask in a genuine attempt to make it better, more realistic.

I confess that I'm struggling with a model that says the PSC earns money that the individual does not need immediately but rather assumes that the following year there is no income, thus freeing up more PA/basic rate bands.

I'm not sure how realistic that is.

My model assumed that the contractor is working pretty much continuously without long breaks.

If that assumption is wrong, then I'm happy to amend.

The scenario I described and worked to for a good few years prior to 2016 divi tax changes did mean that a 'warchest' was built up inside the company, either through profit not yet declared as dividend for withdrawal or a dividend declared but left in the company during uncertain periods of contracting where I wanted to make sure there were no cash flow issues so left some in as a buffer.

Whether the approach is/was suitable depends how much the contractor needs to draw each tax year to live. If operating to a cheaper lifestyle there's more flexibility in how to take the profit out of the Ltd to put to personal use.

This is how some are looking to close a company with lots of retained profit, so looking for Entrepreneurs Relief or some other tax advantage way than just drawing a massive divi that blows through the higher tax brackets.