IR35 for contractors, and how to close a limited company

What is IR35?

IR35 is the common name for the off-payroll working rules, the HMRC rules that decide whether a contractor working through their own limited company is genuinely self-employed or is really a "disguised employee" who should be taxed like an employee. The rules exist to stop a worker who behaves like an employee paying less tax and National Insurance by invoicing through a company instead.

Trading through a limited company gives a contractor a more efficient way to take income and gives flexibility and control over how they work, but it means they usually go without employee benefits such as holiday and sick pay. IR35 is the test that separates a real contracting business from an arrangement that only exists to reduce tax. Getting the answer wrong can leave the wrong party with a bill for tax and National Insurance.

How do you know if you are inside or outside IR35?

A contract is judged to be inside IR35 when the working relationship looks like employment once you set the paperwork aside and look at how the work is really done. HMRC weighs a small number of well-established employment tests, and no single one decides it on its own.

• Control. How much say the client has over what you do, how you do it, when and where. The more the client directs the work, the more it looks like employment.
• Substitution. Whether you must do the work personally, or can send a qualified substitute in your place. A genuine right to substitute points away from employment.
• Mutuality of obligation. Whether the client is obliged to offer work and you are obliged to accept it, as an employee would be, rather than being engaged for a defined piece of work.
• The wider picture. Whether you take financial risk, provide your own equipment, work for several clients and are truly part of your own business rather than part of the client's.

Who decides your IR35 status?

Since the off-payroll reforms, the responsibility for deciding IR35 status depends on the client, not just the contractor. In the public sector, and for medium and large private-sector clients, the client that engages the contractor decides the status and the party paying the limited company deducts tax and National Insurance where the contract is inside IR35.

The important exception is the small-company exemption. Where the end client is a small private-sector business, the responsibility stays with the contractor's own company, which decides its status and accounts for tax under the original IR35 rules.

The small-company test uses the Companies Act 2006 thresholds, which are reviewed from time to time. Confirm the current thresholds and your client's size before you rely on the exemption.

What is a Status Determination Statement?

A Status Determination Statement (SDS) is the written decision a client must give when it assesses a contract for IR35, setting out whether the engagement is inside or outside the rules and the reasons for that conclusion. The client has to pass the statement to the contractor and to any agency in the chain, and must take reasonable care in reaching the decision.

If you disagree with a Status Determination Statement you can dispute it, and the client must consider your points and respond. A blanket decision made without looking at your actual working arrangements is not reasonable care, so a well-reasoned challenge is worth making where the facts support it.

What does being inside IR35 mean for your take-home pay?

When a contract is inside IR35, income from that work is taxed broadly like employment income, so the fee-payer deducts income tax and National Insurance before the money reaches your company, and the efficiency of trading through a limited company largely falls away for that engagement. Many contractors find that a run of inside-IR35 contracts changes the whole case for keeping the company open.

If most of your work is now inside IR35, or you are moving to an umbrella arrangement or back to employment, the limited company can be left with little purpose but ongoing cost. At that point the sensible question is not how to keep it running, but how to close it down properly and deal with any money left in it.

What are your options if your limited company is no longer viable because of IR35?

A contractor limited company affected by IR35 can usually be closed in one of three ways, and which is right depends on whether the company is solvent and how much is left in it. The choice matters because it decides how the remaining funds are taxed and how cleanly the company is brought to an end.

• Members' voluntary liquidation. For a solvent company with retained funds, a members' voluntary liquidation lets a liquidator distribute the reserves to shareholders in a tax-aware way, which can be efficient where the amounts are meaningful.
• Strike-off. For a solvent company with very little left in it, an application to strike the company off the register can be the simplest and cheapest route, provided there are no debts and the company qualifies.
• Creditors' voluntary liquidation. If the company cannot pay what it owes, for example after an unexpected tax bill, a creditors' voluntary liquidation is the correct way to close it and deal with creditors fairly.

Why speak to NTF about IR35 and closing a limited company?

NTF Corporate Solutions helps contractors decide how to close a limited company that IR35 has made uneconomic, with the work carried out by named practitioners, James Kaye and Nick Morgan, who are licensed by the Institute of Chartered Accountants in England and Wales. We are insolvency practitioners, so our advice is on how to wind the company down properly, not on how to challenge an IR35 decision.

As part of the NTF group, we have helped company directors and owners since 2009, we explain the routes in plain English, and the first conversation is free, confidential and without obligation. If IR35 has left your company with more cost than purpose, call us and we will talk you through the right way to close it.