The government’s changes to off-payroll working rules (known as ‘IR35’), which came into effect on 6th April 2021, are forcing many contractors operating Personal Service Companies to review their options. Some have moved into direct employment (and PAYE), others have decided to work through an Umbrella Company on temporary assignments, or even revert to being a Sole Trader.
Whilst these solutions offer a simple way to pay employment taxes, they often mean closing your limited company. However, there are other options.
It’s possible to continue working through a limited company even if your current contract is deemed to be inside IR35. You’ll need to ensure you pay the correct PAYE tax and National Insurance (NI) for any contract which is inside IR35 because you are, in the eyes of HMRC, an employee. You can, however, manage this through your limited company.
At Crunch, we already do this for a number of clients, using the IR35 payroll option in our limited company accounting service. The reasons vary, but often a contractor is working on multiple contracts and only one of them is inside IR35, or perhaps the contract that is inside IR35 is of short duration and the contractor expects to work on contracts which are outside of IR35 in due course.
Now that the new private sector IR35 rules are implemented, unless you’re working for a small end client or business, the responsibility for deciding your employment status and determining whether you're an IR35 contractor sits with your end client, rather than your Personal Service Company. Find out more in our article ‘How to manage the new IR35 private sector rules as a contractor or hiring business.’
Work on a mixture of assignments
It’s important to remember that IR35 status is based on each individual assignment, not on the Personal Service Company (PSC). So, if you’re working on a range of assignments, some ‘inside IR35’ and some ‘outside IR35’, you need to make sure you have the right processes in place.
As mentioned above, you could either run IR35 payroll for the assignments deemed inside, where your limited company makes the correct deductions and pays the employment taxes to HMRC.
Crunch can help with all of this. If your assignment is ‘inside IR35’ and your PSC is responsible for determining your employment status, our IR35 payroll service will calculate your deemed salary payment after deducting tax and National Insurance Contributions. We’ll also file the necessary Real Time Information (RTI) with HMRC direct from your Crunch software every month.
If your assignment is inside IR35 and your end-client is responsible for determining your employment status and paying you, which is the case if your end-client is a public sector organisation, you can use your Crunch software to record the necessary payments and deductions for employment taxes. You can also use this service if an employment agency pays you.
Uniquely, our Premium package includes limited company accounting, accounting for employment taxes, and the ability to switch to an Umbrella service when needed as well as a number of other great IR35 services all for a fixed monthly fee.
Expenses allowance is now available only in limited circumstances
Keeping your limited company open means you continue to have flexibility in the work you choose to take on. You continue to set your own fees and you can work on contracts of any duration you want.
The new rules mean that one of the advantages previously enjoyed by limited companies - the expenses allowance - is now only available to those assignments that are end-clients who meet the small business or overseas company exemptions.
If your assignment is with an end-client that is a small business and therefore exempt from the new rules, you’re entitled to a 5% tax allowance when calculating the employment taxes you must pay. Let’s try to explain how this can benefit you.
The business expense rules for contractors working on contracts inside IR35 are very strict. You can’t usually claim for things like normal travel to and from work or subsistence if your contract with an end client is deemed to be inside IR35. Your tax status is the same as the employees of the end client.
HMRC recognises you incur expenses in running your limited company, so for these situations, you’re allowed to calculate the employment tax you owe based on 95% of the amount your company receives from your contracts which are inside IR35 (as long as they’re for end-clients who are exempt from the new rules).
However, you need to be aware that the allowance doesn’t apply to any contracts deemed to be inside IR35 by your public sector clients, or by end-clients who aren’t small businesses or wholly overseas.
Jack is a contractor working through his own Personal Service Company. He has taken on a contract with a small private sector client due to end in May 2022 which is worth £50,000. The end-client is classed as a ‘small business’ so the new private-sector rules do not apply. The end client will pay Jack’s company the contract amount of £50,000.
Jack has assessed the contract and concluded it’s inside IR35. He knows he needs to pay employment taxes on the income of £50,000.
The effect on Jack’s personal tax and company accounts is shown below.
If the company has no other business expenses, the profit on this contract is £2,500 and will be taxed at the prevailing Corporation Tax rate.
What does IR35 mean for the future of contracting?
The reform of the off-payroll working rules for private sector assignments came into force from 6th April 2021. We’ve summarised the key parts of the IR35 changes in our Knowledge article.
One question we’re often asked is: ‘What does this mean for contractors?’ Although it will see some changes we don’t believe it is the end of contracting as we know it and we’ve written an article explaining why.
If you’d like to know more about how our expert accountants can help you navigate IR35, speak to one of our advisors or book a free consultation. We can help you either continue as a limited company contractor, move to an Umbrella contractor, or even a combination of both with our Premium package.
We have an independent IR35 Calculator tool to help you see if you’re at risk from IR35.