The IR35 reforms, due to be introduced on April 6th, mean that your end hirer will become responsible for determining your IR35 status.
Because this shift in responsibility exposes the end hirer, and any employment agencies that may be involved, to financial risk, you may find that your status is changed from ‘outside’ IR35 to ‘inside’.
Even if your role is not switched to ‘inside’, your end hirer may decide they do not wish to engage with PSC contractors.
If this is the case, it may no longer be possible or appropriate to operate through your limited company. However, we would urge that you don’t act too hastily in closing your PSC. You should consider your options and take advice – we have significant expertise in IR35 legislation so can help you understand the implications and decide what to do.
Weighing up your options
When looking at what to do with your PSC in the long-run, it’s important to explore the following areas:
- Are you confident of your IR35 status?
If your end client decides it is their policy not to use limited company contractors, it may be possible to appeal against your IR35 status determination. If successful, you will want your PSC to remain open so that it’s ready to use.
- Will you find an outside IR35 contract?
If you are going to look for an outside IR35 assignment, either now or in the future, you will still need a limited company to continue contracting. Again, keeping your company open now will save you the cost and hassle of having to re-open a new company in the future.
- Tax efficiency
There are also tax implications to consider before you decide to close your PSC.
If you close your company but then find a new contracting opportunity within two years which allows you to use your PSC again, the money you received when you closed down the company, known as ‘distribution’, will be subject income tax. This means the entire amount could be taxed as dividends and a good portion of it could fall into the higher rate tax band (32%).
Using your PSC when ‘inside’ IR35
It may be appropriate for you to use your PSC, if your end hirer allows, even if you are treated as ‘inside’ IR35. Whilst you’ll have to pay your PSC taxes as well as those imposed via your end client’s PAYE, there may be tax-related advantages.
- 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 – if you currently pay your spouse a salary at market rate for their administrative support, you may wish to continue doing so. Although your company is unlikely to have profit once you are considered ‘caught’ by the off-payroll rule, the 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 sufficient reserves. Again, this should be another factor for consideration.
- Pension –there may be pension-related reasons to keep your PSC open. You can contribute up to £40k to your pension from your PSC in the 2018/19 and 2019/20 tax years. Again, you will need to take advice to understand if this is relevant to you.
What to do next
As we have shown, there are lots of things to consider before you decide whether or not closing your PSC in response to the IR35 reforms is the right approach. Please get in touch with your AccountsNet accountant to discuss in further detail, we will be pleased to help.