Changes to IR35 regulations and the implications for contractors

by Chris Newell

IR35 Regulation Changes

What is IR35?

This is a regulation introduced by HMRC that affects contractors where they are essentially carrying out a role for a company which is akin to that of employee via a company. These companies are also known as “Personal Service Companies” (PSC’s).

So why does this matter?

If a contractor falls under the IR35 regulations, then they will be required to pay income tax and national Insurance Contributions in line with an employee.  This could increase the contractor’s tax by up to 25% which is a significant amount.
A report by HMRC estimated that there are c. 265,000 PSC’s operating in the UK.

What is Changing?

Historically it has been up to the contractor to determine whether, or not, they are caught by the IR35 rules.
On 6 April 2020 the regulations change, meaning the employer becomes responsible for determining whether the IR35 rules apply. It is likely that employers will adopt a more cautious approach and many more contractors will be deemed to fall under these regulations.

What is likely to happen?

As a result of the changes it is expected that there will be a significant number of people earning less money. Additionally, a large number of these PSC’s will no longer be required and there are various options for dealing with them.

What are the Options

Solvent Liquidation
If the PSC has over £25,000 of assets, then a solvent liquidation is a tax efficient option of closing the PSC. Any assets of the PSC (including residual cash) will be distributed to the shareholder(s) as a capital distribution meaning that a lower rate of tax can be obtained which currently stands at 20%. In addition, the shareholder(s) may qualify for entrepreneur’s relief which would lower that rate to 10% at current rates. A significant tax saving!

IF the PSC has assets of less that £25,000 then a dissolution and strike off of the PSC may be an option of dealing with it in a simple and cost-effective manner. 

If you would like to discuss yours or your client’s options, please do not hesitate to get in touch.