25th February 2020
As the date of the IR35 reform in April draws closer, more and more contractors are being asked to seek alternative arrangements to their limited companies. We’ll answer some of the most common questions and explore your options to see if you can still take advantage of running your company.
Is this the end of limited company contracting?
Certainly not. You can still operate through your limited company to trade inside IR35, or even work on different assignments, one inside and one outside as the IR35 status is based on the individual contract.
How would that work? Turnover from the assignment inside IR35 will be taxed at source (just like a salary), and income from the one outside will be accounted for as usual. Your accountant will take care of this while preparing your accounts.
Will you have to close your company while working through an umbrella company? Not at all, our recommendation is to keep it dormant until a contract outside IR35 comes along. Our dual service option was created for exactly this scenario.
The umbrella option
From April the responsibility of determining the status of assignments falls to the fee payer, along with any liability from an incorrectly assessed assignment. Engaging contractors through an umbrella company, therefore, is a safer option to your end client from April, as it eliminates the risk of an incorrect assessment.
How does an umbrella company work? Simply put, when working through an umbrella company, you become its employee and receive your income in the form of a salary. The umbrella company holds the contract agreement while you enjoy full employment benefits and get your taxes deducted at source, avoiding any IR35 issues.
What about expenses inside IR35?
Via a Limited Company
Well, if you work inside IR35 through your limited company, the expenses you can claim are considerably lower, the main reason is that travel and subsistence can’t be put through the company.
If you are asked to visit a site away from your regular place of work, keep your receipts, and you will be able to claim tax relief via personal tax return at the end of the tax year. Travel and subsistence related to your usual place of work can’t be claimed.
The main benefit of claiming business expenses is to reduce the profits subject to Corporation tax, as inside IR35 income is exempt from corporation tax, there is little benefit claiming expenses unless you have accumulated reserves to fund these, if you don’t have accumulated reserves, the expenses will come off your net salary, lowering your take-home pay further.
Working via an umbrella company, the rules are different. As of 6th April 2016, umbrella employees cannot offset their full range of expenses if they are deemed to be under supervision, direction or control (SDC).
Before you start your assignment, SmartWork can help with the assessment of your (SDC) assignment to determine whether travel expenses will have tax relief applied to them or not.
Where there is no SDC, expenses can be claimed. Please visit the SmartWork expenses guide for a full list of what these are.
What does the future hold for contracting?
With the Government shifting responsibility to the fee payer (e.g., agency or end-client) we have seen organisations rush to make the decision not to engage personal service companies (limited company contractors) regardless of the consequences to their business.
Thankfully with the initial panic over, we a greater number of businesses take the sensible approach to change and start assessing contractors on an individual basis. Assignments that are genuinely outside IR35, therefore, should remain in place without change. This will, let’s not forget, benefit the end client, so we are hopeful that the trend will continue.
And then there are the smaller organisations everyone seem to have forgotten about. The IR35 reform does not apply to businesses with a turnover of less than £10m, so contracts signed with these firms will still be self-assessed by the contractor as before.
There is definitely a future still for contracting, so don’t rush into closing your limited company down just yet. If you have no other option than to work through an umbrella company, have a look at what SmartWork can offer. In collaboration with MyAccountant, their dual service can look after your company until that outside IR35 contract comes along.