Are there any benefits to retaining a limited company while working ‘inside’ IR35?

Contractors are used to hearing that it’s best to avoid contracts which place them inside IR35. The main reason being that there’s a fair chance you’ll be deemed to be an employee and tax and NI will be deducted at source.

From April 2020, the government is proposing to change the way the IR35 status is determined for contractors working for medium to large private sector organisations.

What does the change mean for contractors?

Currently, contractors are responsible for determining their IR35 status. Under the new scheme, this responsibility will shift to the engager – the medium to large organisation.

If the engager decides you are outside IR35, fantastic. You can carry on as normal. Yet, they decide you are working inside IR35, the fee-payer in the chain is responsible for deducting the appropriate tax and NI from your net invoice before they pay you. Ultimately, this means you’ll have less money to take home.

What does this mean for the industry?

The fear is that many contractors will choose to leave the industry, taking with them their valuable and much-needed skills. Or, for those who decide to stay in contracting, they may feel they will be better off working through an umbrella company.

Is it all bad news?

The initial thought of contractors we’ve spoken to is, if the engager determines I’m working inside IR35, there’s no point in working through my limited company.

However, surprisingly, there are some benefits to keeping your limited company status:

1. Most contractors choose to work through a limited company because of the limited personal liability which is attached. If it’s decided you’re working inside IR35, this decision doesn’t affect your limited liability status. Therefore, if something does go wrong, your personal assets (such as home and car) should be safe.
2. An ‘inside’ decision doesn’t affect your status as a company director, and such you can continue to make decisions that benefit your business
3. Just because you’re working on a contract which is inside IR35, there’s nothing to stop you taking on other contracts at the same time which are outside of IR35 and enabling you to benefit from the tax efficiencies a limited company provides
4. For contracts which place you outside of IR35, you are free to negotiate rates and payment terms, something you won’t necessarily have if you choose to work through an umbrella company
5. Being a director of a limited company has a certain prestige attached to it. This professional image may help you win bigger contracts
6. For contracts that place you outside of IR35, you may be financially worse off working through an umbrella company
7. Even if one contract places you inside IR35, you can continue to claim legitimate business expenses on contracts where you’re placed outside of IR35
8. Retaining the position of a limited company director may present benefits if you have other business interests
9. There are tax benefits to paying into a pension through a limited company as payments are deemed to be a legitimate business expense, which reduces your Corporation Tax liability
10. While the expenses you can claim for are limited on a contract which places you inside IR35, as a limited company you are entitled to claim a 5% expense allowance in recognition for the costs of running the limited company

With over twenty years of experience, we’ve seen many changes take place in the contracting sector and we’ve helped thousands of contractors adapt to the changes.

If you’re concerned about the proposed private sector IR35 changes, please get in touch with one of our Directors on 01962 867550. Alternatively, send us a message using our online enquiry form and we’ll be in touch shortly.