Although we are waiting for the new government to give us clarity on whether the off-payroll reforms will come into effect from 6thApril 2020, it is important to understand what things need to be considered when the decision is confirmed.
Some large companies, particularly in the banking sector, have already made announcements of their intention to no longer offer contracts to limited companies, with the resulting option being that the contractor will need to go through an umbrella company or accept an employed role. If these changes affect you, or you are unsure, it is important to seek advice and that’s where we are here to help. Your work situation may change, but we would recommend that you take stock of your options to avoid making any knee-jerk reactions, particularly when it comes to closing your limited company.
It might be best to leave your options open for the time being, it is also important to carefully plan, so that, if closing is the best option for you, it is handled in a way that is both tax-efficient and cost effective. We believe the following questions are what you should consider and discuss with us.
Are you confident of your current and future IR35 status?
If in your current contract you are working ‘outside’ IR35, then you will not technically be affected by the expected change in legislation. The new rules affect responsibility for IR35 status determination, not IR35 criteria itself. This means that if you are ‘outside’ now, you should remain ‘outside’ from April 6th 2020, when the new legislation is anticipated to come into force.
If your end client decides it is their policy not to use limited company contractors, you may be able to appeal against this approach. If you win – and this was certainly the case for some of our clients when similar reforms were introduced in the public sector – then you will want your PSC to remain open so that it’s ready to use.
each shareholder has a £2k tax-free dividend allowance each tax year, if your company has enough reserves. Again, this should be a factor when considering whether to keep your PSC open.
How will you extract the money from your company in the best way?
If you close your company but then find a great contracting opportunity within two years and start to trade again, the money you received when you closed the company, known as ‘distribution’, will become subject income tax. This means the entire amount could be taxed as dividend and a good portion of it could fall into the higher rate tax band (32.5%). This is another good reason to keep your limited company, if your medium to long-term circumstances are uncertain.
What is the best tax plan for you?
Even if you are treated as ‘inside’ IR35, you may still wish to work through your PSC because your medium to long-term plans are uncertain. In this situation, you’ll have to pay your PSC taxes as well as those imposed via your end client’s PAYE, but there may be tax-related advantages, depending on your specific circumstances.
Flat rate VAT – it may be that you are better off continuing to operate within the flat rate VAT scheme, if it currently applies to your PSC.
Spouse salary – you may wish to continue paying your spouse a salary at market rate for their administrative support. Although your company is unlikely to have profit once you are considered ‘caught’ by the off-payroll rule, salary can be paid out of your company’s retained earnings, and any loss potentially carried back to the previous year for corporation tax relief.
Dividend allowance – each shareholder has a £2k tax-free dividend allowance each tax year, if your company has enough reserves. Again, this should be a factor when considering whether to keep your PSC open.
Pension – have you considered the pension implications of closing your PSC? You can contribute up to £40k to your pension from your PSC in the 2018/19 and 2019/20 tax years, which may be another tax efficient way to manage the money your PSC earns.
If you close your company but then find a great contracting opportunity within two years and start to trade again, the money you received when you closed the company, known as ‘distribution’, will become subject income tax. This means the entire amount could be taxed as dividend and a good portion of it could fall into the higher rate tax band (32.5%).
What to do next?
These considerations – and more – need to be considered when you are deciding how to respond to the off-payroll reforms. We would recommend you take advice from your Clever Accounts dedicated accountant who can discuss with you the various options and help you work out what will be the most financially sound approach for you.