The controversial mini budget from Chancellor Kwasi Kwarteng has been widely criticised both in the UK and abroad.
But the biggest budget talking point in the contractor sector by far is the announcement of the IR35 reform repeal. Mr Kwarteng said that the IR35 reforms involved “unnecessary cost and complexity” and will be repealed.
So, what does this mean for those contractors who want to work through a limited company, or who had to close their limited company due to the reforms?
To be clear, IR35 will still exist. But the changes made in 2021 putting the responsibility of determining IR35 status on the end-hirer, have been removed. Responsibility for determining IR35 status will now be reverted to the contractor.
Prior to the IR35 reforms, it was common for contractors to work through a limited company, also known as a contractor company or personal service company (PSC). This meant that contractors were responsible for their own tax and NIC.
But the risk of non-compliance and the complicated nature of the IR35 reforms caused numerous companies to impose a blanket ban on hiring external contractors working through limited companies. As a result, countless contractors closed their limited companies so that they could still work for end-hirers both inside and outside IR35. The latest news means that contractors might consider reopening their limited company.
However, it is not quite that straightforward.
While contractors working outside IR35 who work through a limited company will likely be able to legitimately reduce their tax liability, deduct expenses and potentially eliminate NICs, Targeted Anti Avoidance Rules (TAAR) are still in place.
TAAR was introduced to prevent individuals from closing one company in a tax efficient way and setting up another company within a two-year period. If you open a new company within two years of closing the previous one, any closing funds which were previously tax free (due to Business Asset Disposal Relief and other schemes and allowances) might be subject to tax.
So certainly, setting up any new limited company within two years must be treated carefully and we recommend that you take expert advice before doing so.
Contractors who have never worked through a limited company or in the case of a full two years passing since closing the company might well be in a position to contract under a PSC. Again, we do suggest taking advice about your specific situation before making any changes.
Many people in the industry are anticipating that there will now be a widespread disposal of the practice of banning PSCs, and therefore contractors are considering reopening or starting PSC’s. But this is yet to be realised.
Organisations might still be wary of hiring contractors with limited companies, especially those that have adjusted their practices according to the 2021 reforms.
The Treasury estimates the cost of repealing the IR35 will be £6.19 billion up until 2027. A portion of this will no doubt be on employers who will, especially at this time in the economy, be looking at ways to cut down on unnecessary spending.
It is also important to note that the current IR35 rules will still apply until April 2023 and have still to be approved by parliament. Be sure to take expert advice before making any changes to your contracts or way of working.
We at JMK are here to advise our clients and contractors on what these changes mean to them, do get in touch if you have any questions.
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