By Lynne Gowers on 22nd March 2021

IR35 reform – what you need to know as a limited company contractor

If you are a limited company contractor, and have worked on a public sector contract in the last few years, you’ll know that from April 2017, responsibility for determining IR35 status switched from the individual company director to the hiring organisation they were working for.

It has been confirmed that the reforms to IR35 will be extended to the private sector from 6th April 2021 (which was originally expected on 6th April 2020).

Click here to download your free copy of the Boox 2021 Budget Report.

Your client or recruitment agency may have already been in touch with you regarding these changes, what they mean for your current contract and your options moving forward.

For services provided from 6th April 2021 it will be up to your client (if they are a medium or large company) to decide whether you should be classed as an employee for tax purposes.

Impact from 6th April 2021

End client typeWho assesses the worker’s employment statusWho deducts PAYE/NIC if caught by IR35
Public sectorEnd clientFee-payer (eg agency)This has been the case from April 2017
Private sector – large or medium sized companyEnd clientFee-payer (eg agency)This is changing from 6 April 2021 (currently this is the PSC)
Private sector – small companyPSCPSCUnchanged

Status Determination Statement – “SDS”

Clients will make this decision based on your contract and working practices.

Clients will have to issue a “Status Determination Statement” (SDS) to you. This will state whether your contract is “inside IR35” (effectively an employee for the purposes of tax) or “outside IR35” (operating as a business in your own right). If you are working for an agency, the client will be obliged to pass this information down to them.

An update to the guidance for April 2021 also confirmed the PSC as well as yourself as the contractor will also be provided with the SDS and be responsible for ensuring this is passed down the chain.

IR35 Changes – FAQ

Is my client legally obliged to determine the IR35 status of my limited company?

From April 2021, the end client is legally obliged to apply the legislation and issue a ‘Status Determination Statement’ to be used down the supply chain (unless they meet the Companies Act definition of a small company).

Does it apply now?

We can confirm the legislation is effective for services carried out on or after the 6th of April 2021. Until then, the responsibility to deem inside or outside IR35 remains with yourself for taxation purposes.

Can I disagree from being determined inside?

Where your end client deems you inside IR35, there will be a mechanism to challenge this decision of which must then be responded to within 45 days of the dispute. You should contact your end client / agency to obtain their process surrounding this.

An update from the original guidance now shows that the deemed employer can also disagree with the SDS decision.

We are aware of some clients changing their status determination when challenged, so this may be appropriate if you disagree with the outcome.

How will I be paid?

If your status determination is your contract is not caught – there will be no change to how you are paid and operate your limited company.

When you are paid as caught by IR35 you are essentially classified as an employee for taxation purposes. You will therefore have income tax and NIC deducted from your pay before being paid the net amount into the business and referred to as a ‘deemed payment’.

The income tax and NIC is paid directly to HMRC under the PAYE system by the fee payer (the person making the payment to you), as if you were an employee (using your national insurance details).

This applies only to the assignment with the caught status determination, and future assignments may have a different determination dependent on the working practices.

What does having a contract caught by IR35 mean for me?

As a contractor it is likely your overall tax home pay will decrease, where a salary and dividend combination has been used in the past (i.e. you decided your contract was not caught).

Depending on your agency or end client, there may be scope for your rate to undergo an adjustment (upwards). We recommend you have this conversation with your agency or client as these rates may differ based on the type of engagement being offered (e.g. IR35 caught limited company, Umbrella, PAYE with client or agency, or sole trader).

Employee rights vs taxation?

If you are provided with an “inside IR35” classification, you are deemed to be an employee of the client for taxation purposes.

You will not become an employee for employment rights purposes and as such the right to holiday and statutory payments (SMP / SPP) will remain with your limited company.

Any personal pension payments should be made directly from your post tax income and the government will top the contribution up by 20%. Any further tax relief will be obtained in the tax return, where applicable. Any student loan deductions will be made via self-assessment, where applicable.

What does this mean for my company and corporation tax?

If all your income is caught by IR35, your business will record the income and staff costs, which essentially will mean you will not pay any corporation tax.

If you have contracts inside and outside of IR35 for any given period, you will pay corporation tax on the outside of IR35 profits only. In this case, you may wish to continue company pension contributions, if you are a part of a registered scheme, or wish to join one.

My client does not want to work with Limited Company contractors, can they do this?

If your end client has chosen not to work with Limited company contractors due to IR35 it is within their rights to do so as they can choose what type of temporary workers are used within their supply chain, however there is nothing in the legislation that gives them this right.

My client is offering PAYE, what should I do with my company?

If you choose to go PAYE with the client as opposed to securing a new contract you should consider how you wish to proceed with your company.

Consider whether the PAYE contract is for a fixed term or a permanent contract.

If you are due to have multiple contracts for example, another may be outside of IR35 and be beneficial for you to remain contracting for both the flexibility of working for yourself and the added advantage of tax planning so you can decide how and when to take income, such as extracting some of your profits by way of dividends as they carry a preferential tax rate.

PAYE or umbrella will be long term for me and I do not wish to keep my company open.

If you are due to work under a permanent or umbrella role for some time and as such wish to close your business, we can assist with this for you.

As a director of your own limited company, you have certain responsibilities in respect of closing your company, one of which is ensuring all statutory account and returns are filed to the relevant authorities. We can discuss your closing options with you accordingly should you wish to pursue this.

To close the company you can apply to strike-off the company from Companies House. There are various steps to going this and we can provide a quote to prepare the final accounts, tax returns, deregister the company from taxes. You will need to ensure that your company has paid all the taxes due prior to closing.

Alternatively, you can close the company using Members Voluntary Liquidation. This is a formal winding up process that involves a qualified insolvency practitioner. The fees are likely to exceed £1500 + VAT (and possibly a lot more), but could be advantageous where the company has significant assets and business asset disposal relief is available (formerly entrepreneurs relief).

Please note, you have a month’s notice period with Boox and as such if your intent is to close your business and offer notice please do revert accordingly confirming this. We can then agree the final fee date, and produce a closure quote for you.

Are there any other options available to me?

Dependent on your personal circumstances you may wish to consider receiving advice on the adoption of operating as a Sole Trader. We have seen some sectors engage with Sole Traders rather than Limited Companies over recent months, although not all clients allow it. This business format is outside the scope of the IR35 legislation and responsibility of managing your own tax affairs would remain with you. You will therefore be paid gross (unless CIS) and all your income and expenses included on your self-assessment, to be filed by 31st January following the end of the tax year.

Boox as a firm of chartered accountants and we can provide accounting and taxation advices and services to Sole Traders, as well as Limited Companies. For further advice on the suitability of providing your services as a Sole Trader please contact the Boox team.

We are also offering the exciting opportunity to move onto Xero, an award winning accountancy package at no extra cost. Not to worry – we will do all of the migration for you and show you how to operated. We will be contacting you in the next month or so discuss this – and go through all the extras it gives you.

Any changes announced for 6th April 2021 that are different to that expected in 2020?

The SDS must be passed to the PSC as well as the contractor.

The deemed employer in the supply chain can also contest an SDS decision as well as the contractor.

In Summary

The changes to IR35 in this year’s budget are significant and will likely impact all future client relationships. Boox has a range of information, guides and advice we can support you with during this change.

We have produced a handy fact sheet, which offers further information and options available, that you can download here.

Boox clients

Although this reform to IR35 has been on the cards for a while, we appreciate that it is a significant amount of information to digest. If you require any additional support or advice, please contact us on 02392 883315 to speak to a member of your accounting team.

Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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