Understanding changes to the off-payroll working rules (IR35)
Off-payroll working rules change with effect from 6 April 2021. From this date onwards, all public authorities and medium and large-sized clients will be responsible for deciding the employment status of their workers (more commonly referred to as contractors). This latest reform will bring private sector IR35 in line with the public sector, which implemented change in 2017.
Who will be affected by these changes?
These changes will affect most contract workers, meaning those individuals paid through a Personal Service Company or Intermediary Company. The new rules apply to all public sector clients and private sector companies that meet two (or more) of the following conditions:
- you have an annual turnover of more than £10.2 million;
- you have a balance sheet total of more than £5.1 million;
- you have more than 50 employees.
There are also rules which cover connected companies. For example, if the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
What will the client be required to do?
The client must decide the employment status of every worker and will communicate their determination using a Status Determination Statement (SDS). This SDS must then be passed to the individual or organisation they contract with.
The responsibility for deducting and paying over Income Tax and employee National Insurance contributions is the clients, until an SDS is issued with the reasons for it. If the contractual terms of a relationship change then a client need to check again as to whether the rules apply.
Practical considerations for contractors
Another option for contractors is to receive payment via an Umbrella company. An umbrella company is one that employs agency contractors working on temporary contract assignments, usually through a recruitment agency.
These companies have been working as a payroll service for contractors for many years. The umbrella company as an employer, by making the relevant tax deductions from gross pay each week, or month through PAYE. This approach could enable you to hold onto the freedom associated with contracting while enjoying the benefits of being an employee, such as holiday pay or sick pay.
Closing your limited company
If you are affected by these changes, the best way to close your company may be to do using the Member’s Voluntary Liquidation (MVL) procedure. An MVL is a legal process available to solvent companies which allows a business owner to extract capital in a tax efficient way.
The MVL process can allow limited company contractors to pay capital gains tax on reserves when they are paid out, rather than as a dividend subject to income tax. Contractors may also benefit from Business Asset Disposal Relief (formerly Entrepreneur’s Relief), which reduces CGT to 10%.
If your business is insolvent, either because it does not have enough assets to meet liabilities, or it simply cannot pay its liabilities as they fall due, then Creditors’ Voluntary Liquidation (CVL) is likely to be a more appropriate option.
CVL is the most common form of liquidation in the UK and our team is experienced in assisting directors in placing their company into liquidation. It is a voluntary process initiated by the directors and shareholders of a company when they recognise that their business is insolvent. It is usually an appropriate option when the financial position of the company has no prospect of recovery, or when directors simply want to close a company and start afresh.
If you are considering closing your limited company, require any further information, help or advice please do not hesitate to contact us for a no obligation discussion.