On 11th July, the Government issued the draft legislation for the Finance Bill 2019-20. It included plans for the controversial off-payroll reform to be rolled out to the private sector from April 2020, despite the serious concerns raised during the consultation.
The plans are set to impact many contractors who pay tax through Personal Service Companies (PSCs). Many contractors will now be considering whether to continue via a PSC, or whether they now no longer need it. A lot contractors are likely to benefit from the tax-efficiency of a Members’ Voluntary Liquidation (MVL) to close down their limited company / PSC.
What was announced?
The key points included:
- From April 2020, medium and large companies will be responsible for assessing contractors’ IR35 status, and if they’re liable to pay a higher rate of tax. This will shift the responsibility from the contractors, as has been the case since IR35 was first introduced.
- The end-user (‘client) will be responsible for completing a status determination when assessing IR35 status. This is designed to stop blanket assessments placing contractors inside IR35. However, clients will still be able to insist contractors go on the payroll.
- There will be a statutory client led status disagreement process. Any contractors who disagree with their status assessment will only be able to appeal to their client, who might have an interest in their contractors being inside IR35. This announcement disregards previous calls for an independent appeals process.
- There will be an ongoing exemption for small businesses, as per the Companies Act 2006.
How will IR35 affect private sector contractors?
The government has estimated that the changes unveiled in the draft Finance Bill will affect around 170,000 private sector contractors. The changes are intended to ensure two people working side by side, in a similar role for the same employer, pay the same employment taxes.
When the off-payroll working rules come into effect on 6 April 2020, many contractors working through PSCs will be brought under IR35, into the PAYE system where they will be treated as employees. Self-employed workers face paying thousands of pounds extra a year in tax as a result.
The companies these contractors work for will be responsible for deciding their tax status, which will lead to many contractors who are deemed to be inside the rules, getting taxed as an employee and likely paying a higher rate – without receiving any employment rights such as holiday or sick pay.
A lot of companies are likely to end contracts and the option for contractors to work through their own PSC, as happened in the public sector. It’s also likely that many private sector contractors operating through a PSC will be considering alternative options.
Thinking of closing down your PSC?
You may now be thinking that your PSC will no longer be required. If so, you should speak to your Accountant to discuss the best way to close it down.
If your company is solvent, it may be the case that a Members’ Voluntary Liquidation (MVL) is the best solution for you – because of the tax benefits the MVL process provides. This is because in an MVL any funds to be distributed are subject to Capital Gains Tax, rather than Income Tax.
Depending on your circumstances, you may also qualify for Entrepreneur’s Relief (ER), which means you may only pay tax at the lower rate of 10%, if you meet the criteria.
If an MVL is your best option, you will need to appoint an Insolvency Practitioner to liquidate your company.
Clarke Bell can help you with our ‘£995 MVL’ service.
Our experts will help you with every aspect of the process, taking into account your specific circumstances.
Contact Clarke Bell for free confidential advice today.