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With IR35 reform in the private sector now enforced, some contractors are mulling over their next move, particularly if their contract has been assessed as inside IR35.
Due to the puzzling nature of the IR35 legislation, the question of whether contractors can still operate through their limited company while inside IR35 is put to us regularly. After all, many contractors would like to carry on trading through their company even if their assignment is deemed to fall inside IR35.
So can you do this? In a word, yes. But to learn more about why you might want to work this way while inside IR35, please read on…
Before we go any further, it’s important that you have an understanding of IR35 reform.
Following the roll out of IR35 changes in the private sector, medium and large businesses are now responsible for determining IR35 status, like in the public sector. The only instance in which a contractor will continue assessing their IR35 position is when they are engaged by a small private sector company.
Due to these changes and concern over a rise in the number of contractors placed inside IR35 by organisations, the question of whether working inside IR35 through a limited company is possible, is more relevant than ever.
It’s useful to have a clear idea of what it means to work inside IR35. If your contract is deemed inside IR35 it should be because you provide your services in a way that reflects employment, not self-employment. As a result, you become an ‘employee for tax purposes’ and will pay PAYE tax and National Insurance Contributions on your earnings from that contract.
The key thing to remember about IR35 reform is that the rules haven’t changed, but the responsibilities have. For example, unless contractors work with a small company, the end client must assess IR35 status. And if it’s decided that a contract belongs inside IR35 by an end client, the fee paying party in the supply chain (often the end client or the recruitment agency), must make the appropriate PAYE tax and NI deductions before paying you. This means you receive your invoice minus tax, which the fee payer will have paid to HMRC.
If, however, you work inside IR35 when engaged by a small business, you need to calculate and make the ‘deemed payment’ (which is the tax owed from working inside IR35). This isn’t a new development, though - until IR35 reform was introduced it was how HMRC collected tax from all inside IR35 contracts.
In this scenario, 95% of the income earned from a contract that falls inside IR35 will be treated as employment income. HMRC gives contractors a 5% ‘expenses allowance’, which can be used to engage an accountant to help make sure the deemed payment is accurate.
Where IR35 reform applies, this allowance isn’t granted because the contractor will not be the party tasked with working out tax owed to HMRC.
While the 5% expenses allowance has been removed in all but one scenario, it could prove important should you work with small businesses. This can be put towards accountancy fees and meet other costs incurred when running a business.
Contractors often have multiple clients and just because one contract falls inside IR35, that’s not to say the others necessarily will. So it doesn’t always make sense to stop working through your limited company simply because one temporary engagement is caught by IR35.
Aside from the prestige attached to being a limited company director, retaining this status means you are protected through limited liability. So if something does go wrong your personal assets are not at risk, which isn’t the case for sole traders.
Even if your contract is inside IR35, by operating through your limited company you keep control over your business, its fees and the conditions under which you work. The same can’t always be said for umbrella workers or employees.
Contractors often have business interests in addition to their ‘day job’, such as a property portfolio that makes up part of the same company. By continuing to work through your limited company when inside IR35, you can continue to manage all your business interests from one place and with relative ease.
If your contract is deemed inside IR35, you might find that working via an umbrella company instead for that assignment makes more sense.
As an umbrella employee, you pay employment taxes (which the umbrella takes care of on your behalf) and receive employment rights and protections, like sick pay in return. You’ll also be enrolled into a workplace pension, as an employee of the umbrella. In contrast, contractors working inside IR35 via their limited company do not get employment benefits in exchange for paying more in tax.
As part of our Essential Pro and Premium packages, we offer an umbrella solution as and when you need it. With this you can seamlessly switch between your limited company to our umbrella solution, depending on your assignment.
Want to find out more? For more information on how to get the best of both worlds, please request a callback and a member of our team will be in touch.
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Appointing an accountant can save you time and stress when starting up on your own. If you would like to speak to someone about any of the above information or any other queries you may have, arrange a callback and a member of the team will be in touch.