To be a contractor often means that you have to understand precisely how your position works within the confines of the law to ensure you operate legally.
However, the government reforms of working roles which are off-payroll, known as the IR35 legislation, currently in place for public sector companies and to be rolled out to the private sector this time next year, means that any contractor has to stop and think carefully about how they operate to make sure they’re still working within the confines of the law.
We’re going to be taking a look at whether you can continue to act as a limited company in spite of these new changes.
Can I Act as a Limited Company?
So, to clarify, yes you can continue to work as a limited company in spite of the reforms. However, it’s not quite as simple as saying that nothing has changed; there are still things you need to keep in mind.
You’ll need to make sure that you’re paying the correct amount of PAYE tax as well as the standard National Insurance payments for any contract which falls within the IR35 guidelines. It’s also important to note that even now the regulations are changing, and by April 2020, your employment status will be determined by your employer.
Understanding Expenses Allowances
Expenses allowances are still something you can look forward to as a limited company with an entitlement of 5% tax allowance, depending on your circumstances. HMRC understand limited companies incur a certain amount of costs for running a company and so they allow you to make calculations for employment tax based on 95% of the money you get from contracts, assuming that they fall within the category of IR35. Although again, this is something which only applies until 2020.
How Does the 5% Allowance Work?
If you’re a company which does a job that falls within IR35 guidelines, then you can retain the 5% allowance within your retained profits, until such a time as you decide to distribute them. Every year, you can use this 5% to cover a lot of the regular business fees – accounting, marketing and the like. However, it’s also important to note that if you’re someone who doesn’t have business expenses, then you have to pay corporation tax on it instead.
A Look to the Future
IR35 is something which is continuously moving and evolving. This means that right now, all private sector contractions will be subject to a reform of the off-working payroll rules from the 6th of April, 2020. In essence, you can continue to operate as a limited company even with these new policies and regulations, but you have to make sure that you’re paying attention to how the tax allowance works and that you’re paying the correct fees. Tripping up because you weren’t paying attention can severely impact your business and prove to be what triggers a spiral into failure, so be careful.
If you would like any further information, please contact Southside Accountants in Wimbledon.
Written by Aziz Merchant FCCA