The Practical Guide to Limited Company Tax
If you have chosen to operate your business as a limited com...
By Lynne Gowers on 14th October 2016
As summer drew to a close, so did HMRC’s consultation on proposed changes to the intermediaries legislation for off-payroll workers in the public sector.This planned reform of the IR35 rules was announced by the government in the 2016 Budget.
It is proposed that, from April 2017, public sector workers operating their own limited company (also termed Personal Service Company or PSC), will no longer be responsible for determining the IR35 status of their contract.
Instead this will fall to the recruitment agency, public sector employer or other third party who is contracting with the individual’s limited company. If IR35 applies, the party who pays the PSC will also be obligated to make appropriate PAYE tax and NIC deductions and carry out the associated reporting requirements through RTI.
It is further proposed that if the recruitment agency or public sector body is found to have assessed IR35 status incorrectly, they will be liable for underpaid tax and NIC and any interest and penalties.
HMRC have expressed an intention to create an online tool to help determine whether IR35 applies to an assignment – this is expected to be available in late 2016.
Anyone working in the public sector through their own limited company (PSC), including:
So how will this reform actually affect limited company contractors in the above professions?
At the outset of a contract the recruitment agency or public sector employer will decide whether IR35 applies. Currently the onus is on the individual to do this.
If it is determined that a contract falls within IR35, it means the individual is deemed to be an employee for the purposes of tax and National Insurance. The agency or employer will deduct full PAYE tax and NI, as they would for a permanent worker.
If it is determined that a contract falls outside IR35, arrangements will continue as they are today, with company directors being able to pay themselves a combination of salary and dividend and paying corporation tax.
As the liability will fall on the agencies and public sector bodies, if the IR35 status is incorrectly determined, it is likely that they will take a very prudent approach and more people will be caught by IR35 than currently are. Indeed, HMRC have said that they expect most public sector PSCs to be caught by IR35.
The below illustrations are based on a £40,000 income and assume the limited company is registered for flat rate VAT.*
While being found to be within IR35 inevitably reduces the tax benefits of operating a limited company, it is important to stress that there are other real positives of contracting in this way.
These will still apply irrespective of the proposed changes:
The consultation entitled, “Off-payroll working in the public sector: reform of the intermediaries legislation” ran from 26th May to 18th August. It invited views from stakeholders on the perceived impacts of the changes including opinion on a new process for determining IR35 status. Feedback is currently being analysed and the outcome will be publicly available here.
We fully expect a further announcement to be made in the Chancellor’s Autumn Statement on 23rd November 2016.
Colin Gunnell, Managing Director at Boox, commented: “As a firm of chartered accountants as well as full FCSA members, Boox are at the forefront of understanding regulatory change and its impact on limited company directors. We believe that the upcoming reforms to IR35 are likely to impact most PSC limited company directors who work within the public sector. At Boox we will certainly be in a position to help those affected understand the changes and how they can comply and meet their obligations.”
Once the detail of the changes is clear, we will be providing 1-to-1 telephone consultations to all of our clients who are affected, and working with them to decide their best way forward.
For the moment, if you are concerned that you might be caught by IR35, our contractor accounting service includes a high-level IR35 contract review. Alternatively we can put you in touch with someone to conduct a detailed review of your contract and working practices.
For more information see the IR35 Helpline website at http://www.ir35helpline.co.uk
Our handy guide to claiming expenses through your limited company looks at what you can and can’t claim tax relief on through your company
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