The Government has approved the new changes to IR35 which will come into effect from April 2017. But what does this mean for contractors?
According to Deloitte, the average contractor’s take-home pay will see a reduction of 13%. That figure takes into account that whoever pays the Personal Service Company (PSC) will need to deduct income tax and National Insurance, before they transfer the net funds to the company.
For example, a contractor who earns £105,000 per year and, by using a PSC, has a take home salary of £70,988, would see that figure reduced to £61,553 if they were taxed as an employee and switched from paying corporation tax and income tax on dividends.
It is widely considered by experts that by taxing contractors as if they were employees, without them having the rights of an employee, is a way of the Treasury of getting back £400m per year which they say they are losing.
It’s also going to mean that public departments will need to regularly review their need for contractors as opposed to employees. Strategic workforce plans that cover 5 years will be done to highlight where contractors are actually needed.
We’ve spoken before that Chris Bryce, Chief Executive of IPSE, highlighted the change in IR35 legislation as something that could mean irreversible damage to the public sector in terms of the use of contractors, but no one really knows for sure what the outcome will be when the changes are implemented in April 2017.
Possible outcomes for contractors
Some contractors will feel that now is the time to close down their limited company – perhaps to retire or return to full-time employment.
For those companies which are solvent (i.e. they can pay all their bills), directors will be looking to close down their company in the most tax-efficient way possible. A Members’ Voluntary Liquidation (MVL) is a very tax-effective way to close it down. You will need to use an Insolvency Practitioner for this formal process.
For some contractors, these changes could seriously affect their take home salary and cause the company to have cash flow problems. If the company cannot pay its bills, it means that it is insolvent. As the director of the company you have legal duties that require you to address this situation immediately.
Expert help is here
If you are looking to close down your company – whether it is solvent or insolvent – Clarke Bell can give you the expert help you need.
Typically we will work alongside your Accountant and guide you through the whole process.
Contact us now on 0161 907 4044 or [email protected]