Contracting through your own limited company comes with a set of financial implications and it is important to be aware of your responsibilities as a director. The changes to IR35 which were announced in April 2017 mean that there are a new set of rules which you will need to be aware of.
What is IR35?
IR35 is a tax legislation which was implemented to combat tax avoidance. The aim is to determine whether contractors working through a limited company could be considered to be employees of a company or client, rather than a contractor (known as false self-employment).
These rules are applied on an assignment-by-assignment basis, which means some of your contracts may fall inside of IR35. If this is the case, you will be unable to benefit from the same tax efficiencies you are used to on other contracts. For further information regarding the rules and how this could affect you, you can consult our guide.
What do the changes to IR35 mean for contractors?
The changes which came into effect on the 6th April 2017 meant that contractors working inside the public sector were no longer able to define the IR35 status of their contracts themselves and rather the decision lay with the end client. For public sector contractors whose contracts fall outside this status, the new changes could mean that you are now liable for a new set of tax implications. This is because end clients decided to take a ‘one-size-fits-all’ approach to defining the status amongst their contractors.
A new stance on IR35
Since these new rules and the preceding confusion, many contractors across all sectors including the private sector have subsequently been misplaced into IR35, meaning that they will be liable for large amounts of taxes, reducing their take home pay. This has caused a number of public sector bodies including the NHS to retract their original stance, taking the opinion now that the blanket approach may not be the best method of assessing whether a contract will fall inside or out of IR35. In their update, they stated that judgement should instead be applied ‘on a case-by case basis, rather than by a broader classification of roles’.This announcement was made following legal threats from doctors and nurses and there is hope that this may lead many more public sector bodies to follow suit.
This new stance seems to be a promising step to ensuring that public sector workers can still operate through limited companies and as their contract legitimately falls outside IR35, not be taxed in this way. As the rules surrounding IR35 are still complex, it is important to ensure that you understand how your contract could affect your status. Your accountant can provide you with information to ensure you are working as efficiently as possible and if you do fall inside IR35 it may be worth seeking advice from a compliant umbrella company such as our sister company Parasol where IR35 is not an issue.
Help from ClearSky
Our team of accountants have a wealth of experience in IR35 and can provide support and advice whenever you need. For more information, please feel free to call us on 0800 464 0379.