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For both aspiring newcomers to the contracting industry and career contractors, the off-payroll working rules present a dilemma.
If the individual is looking to supply services via an intermediary, like their own limited company, the decision as to whether those services and the role comes within the IR35 rules and must be treated as an employment, falls squarely on the principal or end-user.
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.
At first sight this may appear to wipe out the advantages of being a limited company contractor in their entirety. Not necessarily in every case.
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:
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.
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.
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 make the company dormant. 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.
Dormant companies still have ongoing filing obligations with both Companies House and HMRC, but they are minimal and accountants such as PayStream can provide a low-cost maintenance service if needed.
If making the existing limited company dormant is not feasible or desired, the contractor may wish to consider closing it.
There are significant business tax reliefs available to entrepreneurs who are looking to close or wind up their limited company. Again, advice should be sought from the company’s accountant as to how the timing and method of closure should be arranged.
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. Although not as tax efficient as a limited company, a good umbrella company will provide statutory benefits such as holiday and sick pay and the facility to make pension payments.
This is probably the most common situation in which the off-payroll rules are applied to short, inside IR35 assignments but which have the least deleterious effects. It can still be tax advantageous for a contractor to operate through a limited company where the number or value of outside IR35 assignments are significant in a year.
Here it is likely that the limited company advantages can be applied to the outside IR35 assignments whilst the contractor will be subject to 'off payroll' deductions for the inside IR35 work.
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.
Although the off-payroll working rules have presented problems 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 before making a decision about their future working arrangements.Compare our accountancy services