If you are a PSC Limited Company contractor providing your professional services to a client or a business owner that engages with freelancers and contractors and need some guidance in navigating the IR35 changes in 2021, then keep watching:
A brief recap on the IR35 changes in 2021
The salient points of the new off payroll IR35 changes in 2021 coming into force on the 6th April 2021 are:
From this date, it is your end client or engaging entity, like an intermediary or agency fee payer that has to determine the IR35 status of a contract with you, the contractor.
In order to determine the IR35 status of a contract, a status determination statement is required, which we will cover in the next section.
The new rules apply to the private and public sector, for all end clients that are not classified as small or who are based wholly overseas with no UK presence.
Obtaining a SDS (Status Determination Statement)
In order to obtain a status determination statement, your end client or intermediary fee payer will need to use an appropriate tool, and require your input too.
HMRC’s CEST tool has been developed by none other than HMRC and some end clients may suggest this tool is used. However, and in our opinion, it is questionable whether HMRC’s tool is yet fit for purpose or even impartial.
As an alternative, we recommend the QDOS CEST Tool. Now we are affiliated with QDOS so you are aware, but we have done so for a reason, and that is we believe they are impartial and more thorough than HMRC’s CEST tool, not to mention the in-depth knowledge and experience they have on IR35 changes in 2021.
Remember, you may be starting a new contract before the 6th April 2021, in which case the chances are your end-client will need to make a status determination before the 6th April 2021, particularly if the contract assignment is expected to run past this date.
Inside IR35? How should you operate?
If your contract assignment has been determined inside IR35, then you may have a choice as to how you wish to operate for this particular assignment as follows:
1) Use your existing PSC Limited Company
2) Use a FCSA approved umbrella company.
3) Use your agency or intermediaries own payroll solution
4) Or perhaps you may be given some other option.
Now, the first thing you need to check is whether your end-client or intermediary insist upon you using an approved umbrella solution, whether one on their master services list or their own payroll solution. And if this is the case, you won’t have a choice in the matter.
Which leads to the question, what should you do with your PSC Limited Company? Well, there is no blanket or linear answer to this, and a lot depends on your thinking, circumstances and outlook of the future.
What’s the difference on average in taxation?
A very popular question, and no doubt one that you will want to explore should you be in the position of being provided different rates and options by your end client, or just want to know how much more tax and national insurance you are likely to pay inside IR35 compared to outside IR35. This could help you negotiate a fee rate or at the least help you determine an optimal take home pay.
It’s fair to say that if your contract assignment is determined inside IR35, your average rate of tax and national insurance combined will be higher, depending on your revenue levels.
To do a quick & easy comparison, we recommend an online calculator that will help you grasp the numbers. And there’s no doubt, you will be thinking about negotiating a rate or fee that partly or wholly compensates you for the additional taxation and national insurance in order to achieve a take home pay similar to if the contract fell outside of IR35.
What can you do with your Ltd Co if you are caught inside IR35?
Always remember, IR35 is assessed and determined on a contract by contract basis. Just because one contract or assignment falls inside IR35, it does not necessarily mean all your future contracts will too. However, if a particular assignment ha been determined inside IR35 then you may be thinking about what to do with your PSC Limited Company?
Here are some of our thoughts for your consideration.
1) Close it down through a voluntary strike off or a formal liquidation such as a members voluntary liquidation. Which route is dependent upon your company and your personal circumstances, and whether you have in excess of £25,000 of funds.
2) Keep it open for the foreseeable future:
Generally speaking, you will probably want to consider keeping your PSC Ltd Co open for the following reasons:
- You think and feel you may get outside IR35 contracts in the future.
- You may be getting multiple contracts simultaneously, with a mixture of inside and outside IR35.
- If your end client is classified as ‘small’ in which case the new IR35 changes in 2021 are exempt
- You want to re-purpose your PSC Limited Co and use it for a side business, hobby or some other trading or investment activity.
- You want to time the closure of your Ltd Co at some point in the future for a specific personal or business reason.
- Any other reason that pertains to your specific circumstances.
3) Keep it open and place it in ‘dormant’ status. Read our dormant status guide.
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How can you stay outside of IR35?
This a very pertinent question and we have been asked this numerous times in light of the IR35 changes in 2021.
In short, there is no magic formula here and we know its not what you want to hear, but its reality. However, if you want to stay outside IR35, understandably, then the following is what you should consider:
1) Contract for a small company under the definition of the Companies Act 2006. The small company exemption will then apply.
Small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
2) HMRC have articulated that if an end-client is based wholly overseas, with no UK presence, then the new rules do not apply. However, if your client has any presence in the UK, such as subsidiary then the new rules will apply.
3) Work with your end client to structure your working arrangement, where the substance of your relationship will point you outside of IR35. But this needs to be genuine, and not a contrived arrangement just to avoid IR35. And this really does depend upon your end client or intermediary, after all, the onus from the 6th April 2021 is on them. And don’t forget, they are under pressure too because if they get the status determination wrong by not taking reasonable care in their assessment of an SDS, then then the underlying PAYE taxes and national insurance liabilities could sit with them, so you can probably understand their caution.
What about Umbrella Co’s promising 80%-90% take home pay?
This is another question that had popped up numerous times, and we can fully understand your desire to want optimise and minimise your tax bill.
Where not here to judge such schemes or suggest or provide validation as to whether they are right or wrong, but to help you make an informed decision on them.
First of all, apply common sense. The government introduced IR35 changes in 2021 legislation and their primary objective was to supposedly level the playing field between contractors who behave like employees but pay tax like the self-employed, and employed folk who pay income tax and national insurance at higher rates.
So if a scheme has come along promising you take home pay rates similar to those you could have achieved through your Ltd co, if not better, then ask yourself, do HMRC really endorse these? Who is taking the risk here? And remember, the basic rate of income tax in the UK is 20%, so if a scheme is promising you 90% take home pay, does it even add up?
Secondly, there is recent history with the EBT, Employee Based trust disguised remuneration schemes so many contractors got sucked into. Eventually HMRC caught up with them, often resulting in hefty back tax bills, interest and penalties for the contractor. And what happened to the promoters of these schemes. You guessed it, pretty much nothing.
And lastly, look into Spotlight 45, by HMRC. This will tell you HMRC’s view of such schemes, and what they plan to do should get involved.