What Is IR35 Tax Legislation & Why Is It Starting To Cause Issues?
IR35 tax legislation is designed to tackle those who supply services to a client via an intermediary (such as a company), which would otherwise be classified as an employee if that intermediary was not used.
Being inside IR35 makes the individual liable for income tax and National Insurance Contributions as if they were directly employed by the client (IR35 tax). The implications of IR35 tax is that it could reduce the individual’s net income by up to 25%!
HM Revenue & Customs (HMRC) consider that an arrangement whereby a person who is deemed (by them) to be inside IR35 trades as if they are outside it (such as through a limited company) is tax avoidance.
An amendment to the original IR35 legislation introduced a new Off-Payroll Tax, in April 2000. This required the individual to make their own IR35 determination as regards their contractor/employment status, and they accepted the risks. From April 2021 the determination will be made by the end client, which places the risk on them. Understandably the end client does not want to accept the risk and they are forcing their contractor workforce to change the terms of their engagement.
What Are Your Options?
To date, the easier question to ask has been; are you prepared to fight HMRC if they consider you to be liable for Off-Payroll Tax, or would you rather look at different options to avoid IR35 tax complications?
From April 2021, this decision is out of your hands and it is for the end client to decide whether your working arrangements fall within IR35 tax legislation or not. Lots of clients are deeming their contractor workforce to fall inside IR35 tax legislation, regardless of what the contractor thinks.
If you would rather look at less risky options, these would typically be:
- becoming a PAYE employee of the client
- join a specialist ‘umbrella company’ to offer services to your client as a PAYE employee
- join a specialist ‘umbrella company’ as above, but still retain your existing limited company for continued financial flexibility and freedom
If an ‘umbrella company’ is of interest to you, please contact us and we will refer you to our strategic partner.
What To Do If Your Company Is No Longer Needed
If you become an employee of the end client, or of the ‘umbrella company’, the likelihood is that there is no longer any need or the purpose for your company intermediary.
At this stage, we can assist you in closing or winding up the affairs of your company. The correct route to take will depend on whether your company is solvent or insolvent, and/or what assets (such as cash) are held by the company.
The 3 options to close your company:
- Strike off – appropriate for companies with no assets, cash or liabilities. To go down this route the director needs to be comfortable that all tax affairs are fully up-to-date.
- Members Voluntary Liquidation (MVL) – appropriate for solvent companies, i.e. those companies which have assets of a value greater than their liabilities. We will ensure all tax affairs are fully concluded and any surplus funds may be distributed back to you as a capital distribution. If you qualify for Business Asset Disposal Relief (formerly known as entrepreneurs relief) you could extract these surplus funds at only 10% tax.
- Creditors Voluntary Liquidation (CVL) – appropriate for insolvent companies, i.e. those companies that cannot pay their liabilities as they fall due. We will ensure that the company is liquidated pursuant to insolvency legislation and deal with your creditors.
How Can My Liquidation Help?
Through our strategic partnerships, we can put you in contact with experts to consider your umbrella company options and mitigate the effect of IR35 tax legislation on you. My Liquidation is a licensed insolvency practice, specialising in both solvent liquidations and insolvency processes pursuant to insolvency legislation.
If your chosen route leaves you with a limited company that has no purpose, we can help you wind up the affairs of that company and close it regardless of its financial position. Speak to us today for more information.