IR35 and the implications of closing your personal service companies

20 April 2021 / Insight posted in Articles

Contractors who have until now been working with private sector clients through personal service companies (PSC) may find they no longer want to do so due to changes to the IR35 tax rules. We can help to ensure that, if appropriate, PSCs are wound down in the most beneficial way.

What is IR35?

IR35 refers to off-payroll working rules, which are intended to ensure that contractors who work like employees are taxed broadly as if they were actually employees. These rules specifically apply to individuals who work with clients through their own PSC, and require an assessment as to whether they are essentially acting as a disguised employee.

How has IR35 changed?

On 6 April 2021 (delayed from 2020), changes to the operation of the IR35 rules came into effect for PSCs that provide services to private company clients, other than those qualifying as ‘small’ under the rules.

Previously, the PSC had to assess whether the individual was acting as an employee. From now on, the private company client will need to make the assessment and, if it concludes that the individual is acting as an employee, it will need to deduct income tax and employee national insurance from payments it makes to the PSC.

These revised rules have applied to public sector clients since 2017.

What does this mean for contractors and their clients?

As it is now the clients’ responsibility to determine whether IR35 applies, they may determine that certain engagements fall within the rules, where previously the PSCs had assessed that they did not.

Some private sector clients may be reluctant to engage with PSC at all, as doing so will come with the obligation to carry out an assessment under the IR35 rules. If it is concluded that IR35 does apply, there will be an increases in direct costs. These might include employer national insurance, the apprenticeship levy where applicable, and additional administration time and effort needed to process the deductions.

What are the options if a PSC falls within IR35?

Increasingly, individuals who previously worked through a PSC may start to work directly as employees. If this is the case, contractors may have PSCs that are no longer required.

Closing down an unwanted PSC can be achieved by striking off the company at Companies House or formally placing it into members’ voluntary liquidation, providing it is solvent.  A strike-off request could be turned down if the PSC has creditors, has traded over the last three months, or has changed names over the last three months.

A members’ voluntary liquidation allows a solvent PSC to be formally wound down and, in most cases, its profits extracted in a tax-efficient manner.  If certain conditions are met, shareholders may also take advantage of lower tax rates through business asset disposal relief (formerly entrepreneurs’ relief).

Help from the experts

If you are a contractor and are considering the future for your PSC in light of the IR35 rule changes, speak to one of our experts at Moore Kingston Smith. Our insolvency practitioners and tax specialists can give you advice and recommend a solution for your specific situation.