With new IR35 rules around the corner, we get an increasing number of queries from contractors what they should do with their limited companies. Is it time to close it? Can it still be useful? In this blog post we provide insights and hope it will help you to make the right decision.

Upcoming IR35 Changes: Refresher 

First, let’s briefly refresh what changes are awaiting contractors from April 2020.

• IR35 aims at ensuring that contractors pay the same tax and NI contributions as employees; meaning it is trying to prevent contractors to work as “disguised employees”.
• If IR35 applies, the fee payer (the end-user, a recruitment agency, or other third party paying the intermediary) will be responsible for paying the related tax and NIC.
• IR35 rules have been already implemented for contractors working for public sector organizations and from 2020 will be implemented for private sector contractors, too.
• The new rules will transfer responsibility from contractors to end-users (large and medium companies) to assess IR35.

Contracts inside IR35

We want to clarify that even if your contract is inside IR35, that doesn’t mean that you have to immediately stop operating through your limited company.

You can keep the company, just make sure that for every contact that is inside IR35, you pay correct National Insurance contributions and PAYE tax. Keep in mind that if you work with contracts that are inside IR35, HMRC sees you as an employee.

Advantages of operating through a limited company

Even though IR35 changes will mean that some of the benefits that contractors operating through their limited companies had until now will be lost, there are still quite a lot of advantages left.

More flexibility

It gives you flexibility and freedom of choice: you can decide what projects to work on ‘inside’ and ‘outside’ IR35, how much to charge and set duration of the project.

Practical

If you have a mix of ‘inside’ and ‘outside’ contracts, it might be more practical to continue operating through your limited company.

If you are thinking about working through an umbrella company, keep in mind that if you have contracts ‘outside’ IR35 it will probably not be financially beneficial for you.

Usually, if half or more of your income is from ‘outside IR35’ contracts, it is more beneficial to operating through your limited company.

5% allowance

For small contracts, it will still be the contractor who is still responsible for their own IR35 assessment and the deemed salary calculation.

In this case the contractor will be still entitled to a 5% tax allowance for company running costs.

Closing costs

Closing a limited company costs money. If you have plans to change your profile in the future to take more ‘outside IR35’ contracts, it might not be worth it to close your company now and re-open it again: it might cause you more trouble than having short-term tax consequences for temporarily being ‘inside’ IR35.