IR35 reforms came into force in the private sector nearly a year ago now and, with contractors and businesses hopefully more familiar with the rules, HMRC is expected to bring to an end its tentative enforcement of the rules and begin enforcing them more stringently over the coming months.
As a result, some companies that had previously made quick judgements when the rules came in may take a closer look at their IR35 determinations as they seek to avoid HMRC scrutiny. This could lead to contractors that had previously been determined to fall outside of the scope of the rules finding themselves re-determined as “inside IR35”.
In such an instance, can a contractor continue to work via their own limited company? In a word, yes, a contractor can continue to work through a limited company after an IR35 judgement. However, this may not always be an advisable course of action.
An inside IR35 judgement effectively designates a contractor as an employee of their client business for tax reasons. If an inside IR35 worker continues to trade through a limited company, they will need to manage all of their accounts and administrative duties, while not gaining the rights that come with employee status.
For that reason, an inside IR35 contractor should only continue to work through a limited company providing the circumstances are right. If, for instance, a contractor is deemed to be inside IR35 for a short-term contract, then keeping a limited company open may be more convenient, providing the work doesn’t entail numerous follow-up contracts.
Furthermore, for contractors with numerous clients, it may be the case that some assign the work as inside IR35 and others as outside. If so, continuing with the limited company may prove easier in order to handle any contracts falling outside of IR35. Similarly, if contractors work with small clients (for which IR35 doesn’t apply), as well as larger ones, then maintaining a limited company could prove worthwhile.
Finally, even if a contractor is designated as inside IR35, they may still wish to keep their limited company open. In this scenario, they may choose to adopt a hybrid umbrella-limited company approach, through which outside IR35 work is done through the limited company, while inside IR35 work is completed via an umbrella company.
This hybrid model can enable contractors to reap the employment and administrative benefits that umbrella companies provide, while still maintaining the option to use a limited company for any work that falls outside of the scope of the rules.
Author: Steven English