The number of contractors shutting up shop on their limited companies is rocketing according to insolvency practitioners. With IR35 reform only a few weeks away and the PSC ban in full swing, many limited company contractors have come to the conclusion that the useful life of their limited company has come to an end.
The upsurge in PSC closures may also have something to do with the government considering scrapping entrepreneurs’ relief. The former head of HMRC has called on the government do away with the controversial relief that’s applied to business owners’ capital gains tax. Sir Edward Troup said it was costing the country £2bn a year in lost tax, yet provided “no incentive for real entrepreneurship”.
Although it’s unlikely there will be any changes before the budget on 11th March, limited company contractors are acting now to lock in the tax advantages, rather than risk losing out if the relief is abolished. If nothing else, it’s looking likely that the relief will be drastically curtailed. By initiating voluntarily liquidation, contractors can extract profits from their limited companies in the most tax efficient way.
Currently, the relief reduces the rate of capital gains tax from 20% to just 10% for gains of up to £10m when an individual disposes of their business or shares in a private company they work for. However, contractors need to consider that if you close a company to benefit from entrepreneurs’ relief, then you can’t operate the same or similar trade for the next two years. If you’re thinking of returning to contracting through a limited company in the future, it could be worth keeping your options open by switching to an umbrella company and making your limited company dormant.
A recent industry poll found that nearly 50 percent of contractors don’t know if it would benefit them to work through a limited company or an umbrella structure. However, the current PSC ban means that many contractors simply won’t get the choice. Some businesses are even prepared to strong arm contractors into using certain payroll providers who act as ‘extensions’ of the company payroll, without giving contractors employment rights or room for negotiation.
There have also been reports that some recruiters are going to default their PSC contractors to ‘inside’ IR35 rates in April without notifying them. Although this sounds like a breach of contract, it happened numerous time in the public sector where contractors were simply placed inside IR35 without notification.
The good news is that by switching to an umbrella company of your choosing, you’ll automatically remove the IR35 risk, yet you don’t have to make the decision to close your limited company until you know how the land lies. Until then, you can easily move between inside and outside IR35 contracts, allowing you to retain your options and gain maximum benefits from your contracting work.
While it’s useful to have the option of working through your limited company on contracts that sit outside IR35, there’s very little advantage continuing to operate through your PSC when you’re caught by the IR35 rules. Although your take home rate will be reduced either way, with an umbrella company, you’re entitled to employment rights such as sick pay and holiday pay. You also benefit from having someone to look after all your paperwork and act in your interests when it comes to dealing with agencies and end-clients.
Other options that contractors are considering include taking a permanent job, leaving the UK to work overseas, or living on their savings until the dust settles. Every contractor will have individual circumstances, therefore there isn’t a one solution fits all. However, contractors may regret making hasty decisions that limit their future options, while those who opt to take a sabbatical may find themselves out of pocket if the legislative issues surrounding IR35 drag on. If you find yourself blanketed inside IR35, you can read IR35 Guru’s guide here, or for objective information on switching to an umbrella company, you can speak to your broker.
This content has been supplied by IR35 Guru.
If you’ve been affected by the IR35 reforms and feel unsure about your position, get in touch with us and we’ll talk you through your options. To talk to a member of our team, call: 0203 393 3881