Contractors’ Questions: What should I do with my limited company once IR35 changes?

Contractor’s Question: In the event that I decide to work inside IR35 from April 2020, or work through an umbrella company, or even join the client’s payroll, what should my first consideration be with my limited company?

Expert’s Answer: What you chose to do with your limited company or Personal Service Company depends on which of those three courses of action you take, in light of the Off-Payroll Working in the Private Sector framework.

For instance, if you are going to be working on a contract inside IR35, via your PSC, then it’s largely ‘business as usual,’ bar some important differences that you need to recognise.

Ideally, your accountancy provider should have sight of pay statements you receive to ensure that the transactions are accurately reflected in your accounting records. If you have funds in the company, then any amounts you withdraw over and above the net pay amount advised on your pay statement are still taxable and will require recording on your personal tax return.

Next, don’t forget that if you are VAT-registered, then your agency will pay your company the VAT element plus the net amount of your invoice, so your VAT reporting obligations continue as normal.

Separately, if you chose to work via an umbrella company or go under PAYE initially, you may wish to keep your PSC open in the short or medium-term while you assess the contracting landscape, particularly if you think you may have IR35-captured and non-captured assignments. The idea of alternatively using your company for non-captured assignments but working via an umbrella company for captured assignments is attractive, as this would allow for greater worker flexibility between the two.

Another option is to place your company in dormancy. If you wish to do this, we recommend that you speak to your accountancy provider immediately, as this will normally trigger lower accountancy fees, but note, your HMRC scheme obligations for PAYE/VAT/corporation tax will remain in place, and tick over during this period. At this point, you ought to consider the best or most tax-efficient strategy which will run alongside your umbrella income.

If you have funds in your company, it is likely that this will involve assessing PSC payroll; reviewing your company pensions strategy, together with ensuring that, as a minimum, you benefit from your dividend allowance each tax year.  

Even if you don’t hold any surplus funds in your PSC, from a practical point of view, retaining  a company in its dormant state saves or defers the costs of closing the company down. It also saves on the cost and time of setting up a new one!

If, at some point in the future, you decide that you wish to work via an end-user’s payroll or via an umbrella on a permanent basis, then that would be the best time to consider closing your company. The basic premise here is that statutory accounts are prepared to the date of cessation and that all company liabilities are settled -- any remaining funds can then be distributed to the shareholders. If you continue to hold significant amounts, then there are tax efficiencies to be had by way of capital distribution and Entrepreneurs’ Relief. However, there are specific criteria that needs to be met – for instance, the capital distribution to the shareholders needs to be made within three years of the date of cessation. Good luck!

The expert was Matt Fryer, director of compliance at Brookson Legal.