IR35 and the future of Personal Service Companies
With Budget Day now fixed for 11 March 2020, there isn’t going to be long between then and the IR35 reforms kicking in on 6th April 2020. There is still some hope that the implementation will be delayed for a proper review, but what if…
What is IR35 all about?
IR35 is all about employment status and whether someone trading through a limited company is genuinely self-employed or is a disguised employee - cheating HMRC out of tax and national insurance. Since Gordon Brown introduced the rules in 2000, if you are not genuinely self-employed, then your company must pay almost all its profits out to you as a salary (subject to PAYE and NI) and not in dividends.
The current changes?
What is changing is who needs to make the decision on employment status. It is no longer being left to the contractor. From April 2017, the onus in the public sector was put onto the engager. So the NHS, for example, had to look at the status of locums. It seems eons ago that I was writing about whether Phillip Hammond would extend the public sector rules to the private sector. http://www.cscorporatesolutions.co.uk/csc/news/budget-genius-ir35-stupidity-and-the-end-of-austerity-or-not/ Well, there was too much money at stake for him not to do so and - barring an outbreak of common sense from Sajid Javid - the changes are due to arrive in April 2020.
Who does what?
The 2020 shift in responsibility means that large and medium companies need to make IR35 decisions for each of the contractors that they engage. The worry – and it seems to be what is happening in Aberdeen at least – is that this is leading to a rise in ‘blanket’ inside-IR35 decisions. The engagers – perhaps not wanting to be “shamed” – are avoiding putting their individual heads above the parapet. Rather than taking informed contract-by-contract decisions they are running scared. Which is exactly what HMRC wants. As I have said before, HMRC is no longer interested in helping people to pay the right amount of tax. They are only interested in scaring people into paying more tax. And that’s not a healthy way to run a tax system.
The “safeguard”, of course, was meant to be that if the contractors didn’t like the IR35 decision made about them then they could appeal – and there is a system in place to do that. But we are not getting that far. The existing contracts are being ended, and if you want a job – well here it is – it is a PAYE one. There is no IR35 status decision to appeal. You are getting 25% less whether you like it or not.
Limited companies after April 2020
The immediate outlook is bleak. Six months down the line, commercial reality might have forced the engagers to reconsider. At least, I would like to think so. So, you may not want to rush into any decisions about what to do with the limited company itself.
For now, you may have to take that PAYE job. Yes, if you can find an engager who will take you on through your personal company, you can battle on. If caught by an adverse decision, the engager will automatically deduct NIC and Income Tax from your contractor’s pay, resulting in a reduction of your take-home pay.
If you are unable to renegotiate your rate of pay, you may find that in due course it is more cost-effective to close your limited company. Your choices are limited.
You need to think about what funds will be left in your company and how you extract them. You can take final dividends – but at what tax rate – up to 32.5%? (Bear in mind that in a liquidation you may pay only 10% Capital Gains Tax).
If you can reduce the funds left in the company to nil, then you can apply for striking off. That’s form DS01 for Companies House. Bear in mind you must get your ducks in a row first, or else someone (usually HMRC) will object and the striking off gets stuck.
So get your accounts and tax up to date (to the date trading ceased), deregister for VAT and close any PAYE scheme. Then you can go for a striking off without the government being able to claim assets left in the company. In Scotland there is a person who rejoices in the name “Queen’s and Lord Treasurer’s Remembrancer” who searches for assets that have fallen to the Crown. Don’t leave anything for him.
Member’s Voluntary Liquidation
If there are assets (retained profits) of more than £25,000 then you aren’t going to be able to do a striking off. In that case, you must go down the Members Voluntary Liquidation (“MVL”) route and appoint a liquidator. The liquidator realises the business assets, pays any outstanding creditors, then returns the remaining funds to shareholders.
The important point here is that funds are returned to the shareholders as capital, not income. As a result, you may be able to claim Entrepreneurs’ Relief that reduces the rate of capital gains tax you pay to just 10 per cent. I should mention the downside. Liquidation can be expensive. CS Corporate Solutions can deal with this for you, but it is going to cost several thousand pounds.
The Order of the Phoenix
It is also worth mentioning that there is an Entrepreneurs’ Relief anti-avoidance provision now in force. If you liquidate one company, you can’t start a second company and stay in the same line of business without losing the entrepreneurs relief in the first company. Its not as easy as liquidate this company, we can always start another one. That suggests just “mothballing” the company until the outlook is clearer.
Large and medium businesses in the private sector will soon be forced to take IR35 decisions about their contractors. If you are a contractor and want to consider Members Voluntary Liquidation(“MVL”) or need help with striking-off, we are happy to meet and discuss all of this with you. First meetings are always free.
"I've seen the future and it's much like the present only longer." Dan Quisenberry