Inside IR35: can you work through a limited company?

There are many different ways of working in the UK, including as an employee, sole trader, and for the entrepreneurs, a business owner. Contractors are commonly paid through an Umbrella company, agency PAYE or through their own companies. This article specifically focuses on the scenario where IR35 is a consideration for the type of work and business you run.

If your limited company comes within the IR35 rules and your income must be treated like employment earnings, you may be wondering whether there are any continued benefits to operating a business through a limited company.

Under IR35, assignments which have the hallmarks of employment will be treated as employments and both PAYE and National Insurance Contributions will be deducted from the payments by the end-user (or the agency, if there is one in the supply chain).

Limited Company Benefits & Solutions

There are several different scenarios under which having a limited company may still be beneficial. Let’s look at some common situations and potential solutions:

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Assignment with a ‘small’ end client

Providing that the end client falls within the definition of a 'small business' the onus for making IR35 status determinations rest with the intermediary (usually the contractors’ limited company).

A business will be small if it satisfies 2 or more of the following requirements:

It has an annual turnover not exceeding £10.2m
It has a balance sheet total not more than £5.1m
It had an average of no more than 50 employees for the company’s financial year

In practical terms the end client will advise the agency or potential contractor whether it regards itself as 'small'. If it does, the contractor’s intermediary will make the status determination for the assignment in accordance with the IR35 rules.

Single long-term assignment falling within IR35 and applying the ‘deemed’ rules

If a limited company contractor insists on using his/her company to fulfil the assignment, the end-client will apply PAYE and NICs to payments made to the intermediary (the contractor’s limited company).

There are certain accounting adjustments which subsequently take place when the limited company’s accounts are prepared. It is important to realise that the ability and benefit of claiming tax relief on expenses are severely restricted. The rules are aimed at making the overall tax liabilities of an individual working ‘like an employee’ reflect that of an actual employee.

Choosing to use the limited company and be paid subject to off-payroll deductions needs careful consideration and we suggest the implications are discussed with the company accountants and any involved agency.

Working inside IR35 for the foreseeable future and what to do with a limited company

An option for a limited company contractor in this situation, particularly someone who has the intention of trying to contract outside IR35 in the future, is to stop trading through the company. This means that the company will have no trading activities and will continue to exist pending its’ future re-activation when outside IR35 work contracting work becomes available.

Non-trading companies still have ongoing filing obligations with both Companies House and HMRC, but they are minimal.

Unlikely to obtain outside IR35 assignments again

Alternatively, the contractor may wish to consider closing their limited company.

At the point of closure all company assets will need to be realised and liabilities settled. Advice should be sought from the company’s accountant as to how the timing and method of closure should be arranged and how to extract any remaining profits from the company in a suitable manner.

Stuck with an inside IR35 assignment but wanting the freedom to remain a contractor

The use of a reputable umbrella company is a straightforward solution. It provides the scope and flexibility for individuals to remain in the contracting industry with the option to join and leave as they wish. A compliant umbrella company will provide full statutory benefits such as holiday and sick pay and the facility to make pension payments.

Mixture of assignments falling both inside and outside IR35

It can still be tax beneficial for a contractor to operate through a limited company where the number or value of outside IR35 assignments are significant in a year.

However, many contractors choose the ease and simplicity of working through an umbrella for the inside IR35 work.

Again, care needs to be taken to ensure that the right strategy for the contractor is adopted and that a reliable, compliant umbrella company is chosen.

Ask the experts

Although the off-payroll working rules have presented challenges for many in the contracting industry, its resilience and flexibility have shown that there is usually a solution for every problem. Contractors can take advantage of the extensive help and advice available online and are encouraged to consult reputable accountancy and tax advisers such as PayStream.

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