The benefits of working inside IR35 via your limited company from April 2021
Contractors will have edged themselves a little closer to the screen when reading on ContractorUK that working through a limited company ‘inside’ IR35 can have some benefits.
After all, many contractors contract via limited companies because this method of working is known to be the most tax-savvy way to operate as a freelance professional, particularly when ‘outside ‘IR35.
Is 'Ltd' still best?
The government’s reform of the rule in the shape of the Off-Payroll Tax will, from April 6th 2021, leave many contactors wondering if contracting via a Personal Service Company (or ‘Ltd’) is still the best option.
Now we have been told that there are ‘some benefits,’ contractors will be reassured, especially those who can simply retain their existing limited company. But, asks Helen Christopher, operations director at Orange Genie, what are these benefits? Before answering, we’re pleased to say that forget ‘some.’ There are actually quite a lot.
Deeming you caught / not caught, from April
But first a refresher. Under the proposed legislation, medium and large-sized engagers of contractors will be responsible for determining contractors’ IR35 status and for providing their decision, along with reasons, in a Status Determination Statement. This decision needs to be shared with both the worker and agency that the end-client engages with in the supply chain.
If a contractor is found to be ‘outside’ IR35, then happy days! The contractor can continue to operate in the same way as they have previously and the ‘fee-payer,’ usually the agency, will continue to pay their invoices gross, leaving the contractor free to determine how best to extract income from his or her limited company.
An ‘inside’ IR35 assessment leads to different challenges. Ignoring the assessment is unlikely to be an option, as end-client and agency will not be prepared to take such risks. So, what are the options if you are ruled by your client as caught by the rules for Off-Payroll Working in the Private Sector?
Losing your limited company's unique status; are you really ready?
Some contractors will choose to leave contracting and return to permanent employment while others will decide to work through an umbrella company. An umbrella company offers a simple solution to paying employment taxes and provides the contractor with employment rights. But the contractor loses their individual autonomy, and potentially damages the brand and reputation that he or she has built up over a number of years by closing their company altogether.
Positively, even with an ‘inside’ IR35 decision, it is possible to continue working through a limited company quite productively, effectively and even, with potentially what attracted you to ‘Ltd’ in the first place, completely intact. This is an important point to remember because despite all the HMRC rhetoric to the contrary, contractors aren’t actually motivated to PSCs because of the tax-saving. It’s the limited liability status they want most. And don’t just take our word for it that protection is -- more than anything else -- what motivates contractors to use limited companies. It’s the finding of an HMRC-commissioned study. It’s good to know that however long and invasive the tentacles of IR35 reform might seem, it cannot affect your limited liability status, even in instances where your client decides you are ‘inside’ IR35.
Now you're inside IR35...
When you are deemed captured, the ‘fee-payer’ in the supply chain will be obliged to deduct the appropriate tax and NI from the contractor’s net invoice value before making payment. Once the funds have been paid into the contractor’s company, he or she is free to withdraw them as they need them with recognition for the tax paid being given.
Despite the obvious, immovable fact that an ‘inside’ IR35 contractor is inevitably going to be taking home less money at the end of the month -- unless of course he or she can negotiate an increase in the daily pay rate (which is recommended of course), there are actually many other sound reasons for wanting to retain the limited company. Ten in fact:
10 reasons to retain a limited company
- First and foremost, as we have outlined, the contractor’s personal liability is limited, as a director of the company, if things go wrong. So their personal assets are off-limits (unless a personal guarantee was given by the contractor).
- Even with an inside IR35 decision, a contractor gets to keep control over his or her business, to the extent that they can accept contracts both ‘inside’ and ‘outside’ IR35.
- Where a contractor has multiple contracts, some of which are ‘inside’ and some ‘outside’, or where the ‘inside’ contract is for a short duration, a limited company can still prove to be more financially-attractive with the appropriate tax planning
- Just because you’re inside IR35 for one contract, you still retain the ability to work when you want on other contracts and to set your own fees and terms.
- Found ‘inside’ IR35 does not interfere with the fact that running one’s own company is still the most viable way to keep control of your day-to-day business as a temporary consultant, and being able to manage your finances as you see fit.
- Future contracts that are ‘outside’ IR35, if worked through an umbrella company, would leave you, the contractor, significantly worse off.
- If an engager is deemed to be “small,” then the contractor is still responsible for their own IR35 assessment and the deemed salary calculation in this scenario will still entitle the contractor to a 5% tax allowance in recognition of the cost of running the company.
- Operating through a limited company (even if ‘inside’ IR35) may provide better opportunities for future pension planning.
- Operating through a limited company may be advantageous if a contractor has other business interests, or a ‘Plan B,’ and he/she wishes to present a ‘professional’ business image of their enterprise.
- Other than for the IR35-captured contract, the contractor is still in business on their own account, meaning the company can pay bills on its own, buy its own equipment and reimburse its director for certain expenses such as professional development and training.
While some contractors may have historically made the decision to operate through a limited company purely because of optimal take-home pay, many had other reputational, professional and personal reasons for choosing the freedom of limited company contracting as a way of life. The changes on April 6th 2021 may well change the way a contractor’s IR35 status is assessed, and it may reduce take-home pay, but it will not change the attraction of a limited company for those that were always operating that way for reasons beyond tax planning.