Budget 2021: End of the road for inside IR35 contractors
A small cohort of limited company contractors had been holding onto hope that the Chancellor would use his recent Budget statement to once again delay a set of damaging IR35 reforms.
IR35 changes were originally due to be implemented in April 2020, but coronavirus-related disruption pushed the reforms back until April 6 2021.
Some contractors were hoping that the reforms, which will see many contractors pay more in tax, would be pushed back again. But Rishi Sunak’s latest Budget came and went without any mention of the ‘disguised employment’ tax. This means that contractors must now accept that the changes will be implemented next month and plan accordingly.
What should limited company contractors do next?
Everybody is in a slightly different boat, and you should speak to an expert for tailored advice, but most limited company contractors have a few options available to them. These include:
- Continue operating as a limited company contractor and potentially paying more in tax
- Wind up limited company and seek an employee role
- Wind up limited company and switch to another method of contracting, like working through an umbrella company
Each contractor will need to decide what is best for them based on their working practices and personal situation.
For contractors that work wholly or primarily on outside IR35 contracts, there should be no issue in continuing to operate through a limited company in the same way as before.
However, for contractors that are judged to be ‘inside IR35’, operating through a limited company will result in higher tax liabilities, without any of the benefits that come with employment.
Some contractors may think that this deal isn’t worth the hassle and will abandon contracting altogether. But many others will want to continue contracting. One of the best ways of doing this is by working through another intermediary, like an umbrella company.
Working through an umbrella company makes life more straightforward for contractors. Umbrella contractors also benefit from employment rights like holiday and sick pay.
The best way to wind up your company
If you decide to join an umbrella company or leave contracting altogether, then you will need to wind up your limited company. This process is also called liquidating your company.
Liquidation is when a company’s assets are used to pay off its debt and any leftover money is distributed to shareholders (in this case, usually the contractor).
As long as your company is solvent - meaning it can afford to pay its debts - the best course of action is usually a Member’s Voluntary Liquidation (MVL). Contractors usually do this when they want to retire or quit contracting.
Using a Member’s Voluntary Liquidation allows contractors to liquidate assets in the most tax efficient way possible, paying capital gains tax on reserves rather than income tax. Contractors can also benefit through Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), which reduces capital gains tax to 10% on qualifying assets.
A Member’s Voluntary Liquidation is a formal legal process that needs to be completed by a Licensed Insolvency Practitioner. Once you appoint an Insolvency Practitioner, they will help you complete all the necessary steps to formally liquidate and close your limited company.
Umbrella has a specialist Insolvency division, Umbrella.UK Insolvency, to help clients wind up in the most tax efficient way possible. For more information, speak to a member of the team today. Call: 0800 121 6513 or visit https://www.umbrella.uk/members-voluntary-liquidation-mvl/