The IR35 tax changes for the private sector are set to come into effect in April 2020, but many contractors are still confused when it comes to wrapping their heads around all the complexities, and working out how it could impact their businesses.
Self-employed workers are likely to see their incomes affected due to the changes, as the new rules seek to stop so-called ‘disguised employment’. Currently, a contractor who works for multiple firms can use an intermediary, such as a limited company. This can help reduce the tax bills for them and their employer.
However, the IR35 changes will make it so that private sector companies will be responsible for deciding the tax status of the contractors and freelancers working for them. So, if you’re a contractor in the private sector then it’s likely your income will be affected.
How have things worked?
If you’re a contractor working through a limited company, this allows you to pay corporation tax at 20% on your profits. Claim business costs against your tax bill, and avoid paying full national insurance. Of course you can also pay yourself a lower wage, topped up with dividends. This will all cut your tax bill considerably.
Changes to the dividend tax-free allowance and tax rates though have made things not as lucrative. By increasing the threshold at which becoming a limited company becomes worth it for people.
The IR35 tax changes will make things even harder for contractors and freelancers who want to work as a limited company.
How will your income be affected?
A big percentage of freelancers are largely unaware of the impending changes, and how they will impact their business. As mentioned, when the changes come into effect, private sector companies will be responsible for deciding your tax status.
If you’ve structured your business as a personal service company (PSC) or Limited company, then you could end up paying thousands more in taxes. This is because when the law comes into force, your clients will make the decision about whether you will be taxed at source or paid gross.
If you are deemed to be inside of IR35 on a specific contract, then you’ll be taxed at source (income tax and NI), which will result in less money in the bank. This can see your net income reduced by up to 25%, with additional income tax and NICs costing thousands. Your ability to take business risks, through taking money out using dividends instead of salary, will also be impeded.
Companies that fail to factor in the potential impact of the changes will see administrative pressures mount, along with a sudden increase in internal paperwork and recruiter costs.
Thinking of closing down your limited company?
This can all understandably lead you to decide that closing your limited company is now an ideal option. If you’re considering this, then it’s advisable to speak to an 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. As it will allow for any distributed funds to be subject to Capital Gains Tax, as opposed to Income Tax.
Depending on your circumstances and if you meet the criteria, you may also be entitled to Entrepreneur’s Relief (ER), which means you may only pay tax at the lower rate of 10%.
Remember you’ll need to appoint an Insolvency Practitioner to liquidate your company if you decide that an MVL is your best option. At Clarke Bell, we can help you with every aspect of the process, while taking all of your specific circumstances into account .
Contact Clarke Bell for free confidential advice today.