Although the regulation may appear scary, it does not imply you should avoid working through a limited company if you are inside IR35, since there are still numerous benefits. There are more tax benefits if you work outside IR35 (which is fair due to the increased burden), but just because a particular contract falls within IR35 does not mean you should instantly seek alternative solutions.
- If you’re inside IR35
- Whether Limited Company is still the best option?
- Reasons for retaining a limited company
If you’re Inside IR35
When you are deemed captured, the supply chain's 'fee-payer' is required to deduct the appropriate tax and national insurance from the contractor's net invoice value before making the payment. When the funds have been paid to the contractor's company, the contractor is free to withdraw them as needed, with the contractor receiving recognition for the tax paid.
Despite the obvious, unavoidable fact that an 'inside' IR35 contractor will inevitably earn less money at the end of the month — unless they can negotiate an increase in the daily pay rate (which is always recommended), there are several other compelling reasons to retain the limited company.
Whether Limited Company is still the best option?
From 6 April 2021, the government's reform of the rule in the form of the Off-Payroll Tax left many contractors asking whether contracting via a Personal Service Company (or 'Ltd') is still the best option.
Certain contractors have left contracting and seek permanent employment, while others choose to work through an umbrella company. An umbrella company simplifies the process of paying employment taxes and provides employment rights to the contractor. However, the contractor loses their individual autonomy and may hinder the brand and reputation they have built over time by closing their company entirely.
Positively, even with an ‘inside' IR35 decision, it is still possible to continue working through a limited company in a productive, efficient and effective way, and possibly with the aspects of your business that initially brought you to ‘Ltd' intact. This is critical to remember because, despite HMRC's rhetoric to the contrary, contractors are not motivated to PSC’s solely for the tax benefits. It is the limited liability status that they are most interested in. And don't take our word for it that protection is the primary reason contractors form limited companies. This is the conclusion of a study commissioned by the HMRC. It's good to know that, regardless of how long and harmful the consequences of IR35 reform look, they cannot affect your limited liability status, even if your client determines that you are 'inside' IR35.
Reasons for retaining a limited company
- To begin, as previously stated, the contractor's personal liability as a director of the company is limited if something goes wrong. As a result, their personal property is off-limits (unless the contractor gave a personal guarantee).
- Even if an inside IR35 decision is made, a contractor retains 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 of which are 'outside,' or where the 'inside' contract is for a short duration, a limited company may still be more financially attractive with proper tax planning.
- Even if you are under IR35 for a single contract, you retain the flexibility to work when and how you want on other contracts, as well as the ability to set your own fees and terms.
- Finding yourself ‘inside' IR35 does not remove the fact that running your own business is still the most viable option for maintaining control of your day-to-day business as a temporary consultant and managing your finances as you see fit.
- Contracts in the future that are 'outside' IR35 would leave you, the contractor, significantly worse off if you worked through an umbrella company.
- If an engager is deemed "small," the contractor is still responsible for their own IR35 assessment. In this scenario, the deemed salary calculation still entitles the contractor to a 5% tax deduction for business expenses.
- Using a limited company (even if it is 'inside' IR35) may provide more opportunities for future pension planning.
- Operating as a limited company may be advantageous if a contractor has additional business interests or a 'Plan B' and wishes to present their enterprise in a 'professional manner.
- Except for the IR35-captured contract, the contractor is still operating on their own account, which means they can pay their own bills, purchase their own equipment, and reimburse their director for certain expenses such as professional development and training.
While some contractors may have historically chosen to operate through a limited company solely for the purpose of optimising take-home pay, many others chose the freedom of limited company contracting as a way of life for reputational, professional, and personal reasons. The changes from 6 April 2021, altered how a contractor's IR35 status is determined and resulted in a reduction in take-home pay, but they have no effect on the attraction of a limited company for those who have always operated through the limited company for reasons beyond tax planning.
If you'd like to learn more about how our skilled accountants can assist you with navigating the future IR35 changes, contact one of our DNS advisors or book a free consultation. For taking a specialist advice on "Inside IR35 if working through a limited company”, kindly call us on 03330886686, or you can also e-mail us at email@example.com.
Also See: Contractor & IR35 myths debunked