The government’s changes to off-payroll working rules (known as ‘IR35’), which are due to finally come 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 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.
However, you need to be aware, even after the delay announced by the government, IR35 rules are still due to change from April 2021. When the changes are implemented, unless you’re working for a small end client or business, the responsibility for deciding your employment status will sit with your end client, rather than your Personal Service Company.
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, or you could work through an Umbrella company such as the Umbrella Service we can offer for these assignments.
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.
Expenses allowance
Currently, you can continue to enjoy advantages in operating your limited company – including an expenses allowance.
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.
Another advantage of keeping your limited company operating is that, until 5th April 2021, you may be entitled to a 5% tax allowance. 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 cannot 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 and therefore you’re currently allowed to calculate the employment tax you owe based on 95% of the amount your company receives from your contracts which are inside IR35.
However, you need to be aware that the allowance does not apply to any contracts deemed to be inside IR35 by your public sector clients. This allowance is due to be removed on 6th April 2020 for any private sector contracts that are deemed to be inside IR35.
Example
Jack is a contractor working through his own Personal Service Company. He has taken on a contract with a private sector client due to end in March 2020 which is worth £50,000. The end client will pay Jack’s company this amount. 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.
| Personal Tax – deemed employment payment computation |
|
£ |
Notes |
| Income |
50,000 |
Amount Jack’s company is paid by the end client |
| Less: 5% allowance |
(2,500) |
Allowance for expense of running a limited company |
| Gross deemed payment |
47,500 |
Amount used to calculate tax liabilities. |
| Less: Employers NIC |
(4,713) |
Amount to be paid to HMRC by Jack’s company |
| Net deemed payment |
42,787 |
This is Jack’s gross salary which will be subject to income tax and employee national insurance contribution. He will need to include the net deemed payment amount of £42,787 on his Self Assessment as employment income. |
| Company accounts and Corporation Tax |
|
£ |
Notes |
| Turnover |
50,000 |
Amount Jack’s company is paid by the end client |
| Less expenses |
| Director salaries |
(42,787) |
Salary paid to Jack by his limited company |
| Employers NIC |
(4,713) |
Amount to be paid to HMRC by Jack’s limited company |
| Profit before tax |
2,500 |
5% allowance on the engagement income payment. |
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.
How does the 5% allowance work?
As the allowance is part of the company’s taxable profit, it will remain within its retained profits until it’s distributed to shareholders. On an annual basis, the amount can be used to cover normal business expenses such as accountancy fees, cost of running payroll, promotional and marketing costs for your limited company. If you don’t have any business expenses, you’ll pay Corporation Tax on the amount.
What does the future hold for IR35?
The government has decided that the reform of the off-payroll working rules in the public sector will be introduced for private sector assignments from 6th April 2021. We’ve summarised the key parts of the IR35 changes in our Knowledge article.
If you’d like to know more about how our expert accountants could help you navigate the upcoming IR35 changes, 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.
Our “What is IR35?” hub is the place to head for all things IR35 – we have an independent IR35 Calculator tool to help you see if you’re at risk from IR35, a jargon-free IR35 business guide as well as articles explaining everything you need to know about IR35.
