The Autumn Budget on November 6th was due to give us much-needed clarity on whether the off-payroll reforms would come into effect next April, however, it has now been delayed.
Despite the current uncertainty, we are already seeing a number of large companies, particularly in the banking sector, announcing their intention to treat all contractors as if they are ‘inside’ IR35.
If you are affected, or anticipate being affected, by the IR35 reforms, you will need to consider your options and take specialist advice. Your current working arrangements may indeed change, but we would recommend that you avoid making any knee-jerk reactions, particularly when it comes to closing your limited company. Not only might it be best to leave your options open for the time being, it is also important to think carefully and plan ahead so that, if closing is the right thing to do, it is handled in a cost-effective and tax-efficient manner.
Here are the questions you should consider and discuss with us.
Are you confident of your IR35 status?
If you are currently working ‘outside’ IR35, then you will not technically be affected by the change in legislation. The new rules affect responsibility for IR35 status determination, not IR35 criteria itself, so if you are ‘outside’ now, you should remain ‘outside’ after April 6th 2020 when the new legislation comes into force.
If your end client decides it is their policy not to use limited company contractors, it may be possible to appeal against this approach. If you win – and this was certainly the case for some of our clients when similar reforms were introduced in the public sector – then you will want your PSC to remain open so that it’s ready to use.
Are you going to seek an alternative contract that is outside IR35?
If so, either now or in the future, you will still need a limited company to continue contracting. Again, it’s a good idea to keep your options open at this stage.
How will you extract the money from your company in a tax-efficient manner?
If you close your company but then find a great contracting opportunity within two years and start to trade again, the money you received when you closed down the company, known as ‘distribution’, will be subject income tax. This means the entire amount could be taxed as dividend and a good portion of it could fall into the higher rate tax band (32%). This is another good reason to keep your limited company, if your medium to long-term circumstances are uncertain.
What is the best tax plan for you?
Even if you are treated as ‘inside’ IR35, you may still wish to work through your PSC because your medium to long-term plans are uncertain. In this situation, you’ll have to pay your PSC taxes as well as those imposed via your end client’s PAYE, but there may be tax-related advantages, depending on your specific circumstances.
- Flat rate VAT – it may be that you are better off continuing to operate within the flat rate VAT scheme, if it currently applies to your PSC.
- Spouse salary – you may wish to continue paying your spouse a salary at market rate for their administrative support. Although your company is unlikely to have profit once you are considered ‘caught’ by the off-payroll rule, salary can be paid out of your company’s retained earnings, and any loss potentially carried back to the previous year for corporation tax relief.
- Dividend allowance – each shareholder has a £2k tax-free dividend allowance each tax year, if your company has sufficient reserves. Again, this should be a factor when considering whether to keep your PSC open.
- Pension – have you considered the pension implications of closing your PSC? You can contribute up to £40k to your pension from your PSC in the 2018/19 and 2019/20 tax years, which may be another tax efficient way to manage the money your PSC earns.
What to do next
These considerations – and more – need to be taken into account when you are deciding how to respond to the off-payroll reforms. We would recommend you take advice from your JSA accountant who can discuss with you the various options and help you work out what will be the most financially sound approach for you.