IR35 and Limited Companies
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: IR35. But can you continue working through your limited company if you are caught by IR35?
In this comprehensive guide, we delve deep into the heart of IR35. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to demystify IR35, empowering you with the knowledge to make informed decisions and remain compliant.
Working Inside IR35 Through a Limited Company
IR35 is forcing many career contractors used to working through a limited company to review their working arrangements. Some have moved into direct employment, while others have been forced to work through an umbrella company.
While these solutions offer a more straightforward way of ensuring IR35 compliance, they often mean closing your personal services company. There is, however, another option.
While not common practice, it is possible to continue working through a limited company if your current contract is determined to be inside IR35. You don’t have to sign on with an umbrella company immediately.
That said, while it is technically possible, most clients will refuse to hire contractors who work through a limited company while Inside IR35. They will have preferred methods of engagement, usually via an umbrella.
Contractors that can work via their limited company while inside IR35 will have taxes deducted at source by the fee payer (usually the client). The fee payer will allocate a tax code and make the relevant deductions for employers’ national insurance, personal income tax and national insurance.
The remaining amount is then paid to the limited company along with any VAT owed. As the fee payer has already deducted tax from the monies paid to the limited company, the contractor does not need to pay further personal taxes (income, NICs, or dividends), and the company does not need to pay any corporation tax on the received amount.
The contractor can take the total amount as a tax-free salary, transferring the money from the limited company directly to their personal bank account with no additional funds owed to HMRC. There is no double taxation. This video explains the process in detail.
Contractors working through a limited company while Inside IR35 should remember to check the amount of income tax deducted from the source by the fee payer. The fee payer only has sight of the current contract; they do not have knowledge of any other money the contractor may be earning.
For example, a basic rate of 20% of income tax may be applied despite the contractor being a higher or additional rate taxpayer. If this occurs, the contractor must pay any outstanding tax through their self-assessment at the end of the year.
When is it Viable?
Working Inside IR35 via a limited company may be viable if:
- End Client Insists: Although most end clients insist on engaging Inside IR35 contractors via an umbrella company, some prefer the limited company option.
- Multiple Assignments: If you are working on multiple contracts, some caught by IR35 and some not, you may decide it’s easier to run them all through the limited company. Operating via a limited company retains the ability to accept contracts both inside and outside IR35.
What are the Limitations?
The inherent limitation of working via a limited company while inside IR35 is that many clients will refuse to engage you. They do not want to adopt the additional responsibility of allocating a tax code and making relevant tax deductions.
In addition, a lack of clarity regarding the IR35 rules means that clients insist on contractors using an umbrella company. Despite working through a limited company being a perfectly acceptable way to operate, clients do not want to risk being incorrect in their approach and exposing themselves to potential tax liabilities.
It’s also worth noting that, despite working through a limited company, if your contract is Inside IR35, you are still significantly restricted by the expenses you can claim.
What are the Alternatives?
One option for a limited company contractor caught by the IR35 legislation is to make their company dormant. The company will have no trading activities, although it will still have ongoing (albeit minimal) filing obligations with both Companies House and HMRC. In this way, the limited company will continue to exist pending its future re-activation when outside IR35 contract work becomes available.
If making the existing limited company dormant is not desired, the contractor may wish to consider closing it and taking advantage of the significant tax reliefs available.
Outside IR35 and Limited Companies
If your contract is outside IR35, you operate as a genuine business-to-business relationship and can work through a limited company. You earn revenue, claim expenses, and can take advantage of efficient tax planning arrangements.