Contractors’ Questions: Would umbrella contracting in the same skill scupper my Entrepreneurs’ Relief claim?

Contractor’s Question: I’m looking at my company’s future whereby I’d switch between my limited company for outside IR35 work, and a PAYE umbrella company at inside IR35 gigs or at ‘we no longer use PSC’ clients.

If I went brolly, but potentially with the same client, would it scupper any claim for Entrepreneurs’ Relief (ER) , due to it counting as a ‘similar trade or activity’?

Even if I went with a completely different client (because, say, my banking client is terminating all PSCs and a rival bank is doing the same), and if I want to stay as a Cyber Security Response Analyst, would it still count as being a ‘similar trade,’ meaning I’d be denied ER?

Expert’s Answer: Switching between an umbrella working arrangement and then through your own company is indeed a model which contractors appear to be increasingly looking at, mainly due to existing and incoming IR35 reforms. In your situation, and if you opted for a switch model, it would almost certainly be best to cancel any salary through your company to prevent too much income causing higher rate tax over the course of the whole tax year.

Going through an umbrella company more permanently should not prevent you from an Entrepreneurs’ Relief claim, but such a claim could only be made after you had arranged for your company to be dissolved (probably through a Members Voluntary Liquidation). In that case, you would of course not be able to put any more work through the company as it would no longer exist.

If you created a new company within 24 months of the capital distribution of the old company, and you would be doing pretty much the same type of thing (analysing or responding within cyber security in your case), then HMRC could claim that you have breached the Targeted Anti-Abuse Regulations. That would allow them to withdraw your ER claim on the company’s closure and force you to declare the distribution as dividends. That would mean a lot being taxed at 32.5% rather than 10%.

If you joined the rival bank you mention via an umbrella company arrangement, however, this would not disrupt the ER claim. Before taking any actions whatsoever, I recommend you consult an expert in these matters.

The expert was John Bell, founder and senior partner at licensed insolvency practitioners Clarke Bell.

Tuesday 12th Nov 2019
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Written by John Bell

John Bell is a Fellow of the Institute of Chartered Accountants and a Licensed Insolvency Practitioner.  He founded licensed insolvency practitioners Clarke Bell in 1994 and, to date, the company has conducted over 1,800 MVLs.
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