Many contractors provide services to clients via their own limited companies. In tax talk, this is often referred to as a Personal Service Company, or PSC.
A PSC is generally defined as a limited company with a sole director - the contractor. That person owns all - or the majority of - the shares. PSCs provide professional services delivered by an individual, direct to a client, or via an agency.
Disguised employees are those who falsely position themselves as limited company contractors. They often do this to pay less tax, something HMRC sees as tax avoidance. HMRC introduced IR35 to help decide whether contractors are working through their limited companies correctly. The legislation tends to concern freelancers and contractors who provide their services via Personal Service Companies (PSCs).
If certain conditions are met then, under IR35, the earnings of the PSC are considered to be a 'salary', on which, Income Tax and National Insurance contributions (NICs) are payable. This means you're 'inside', or 'within', IR35. Where such conditions are not met, a contract is deemed 'outside' IR35.
Reforms to IR35 in the private sector came into force at the start of April 2021. They followed similar changes made in the public sector in 2017. The rules intend to ensure that those who bill for their services via a limited company - despite working in the same way as an employee - are paying the right employment taxes.
It's important to note that you won't be responsible for assessing the IR35 status of your contract unless your end client is a "small business". That decision is no longer yours and is instead determined by your client.
1. Charlotte’s a contractor who designs websites for clients via her PSC, 'Charlotte’s Webs Ltd'.
2. Her current clients are quite particular. So, her contract requires her to follow set processes, complete company training and provide the service personally.
3. She’s given tasks to fill her time while waiting for feedback and also spends weekdays in the office.
4. Charlotte’s pretty happy. The money’s good and her client has to provide regular work. She even gets a company email and is issued a laptop to complete her assignments.
5. The problem is, due to these circumstances, HMRC are likely to deem her as being inside IR35.
6. This isn’t ideal, as the tax implications of her IR35 status could prove pretty costly. But could the solution to her quandary lie in umbrella employment?
If you're employed by an umbrella company, you won't get caught by IR35. The legislation targets those who should be classed as employees, but aren't. As a consequence, IR35 doesn't apply to umbrella company employees.
By working through an umbrella company, you'll become an employee. This includes statutory entitlements like holiday pay, sick pay, and paternity or maternity pay. You'll also get the invaluable asset of continuous employment. This is often a requirement if you wish to access financial products at more attractive rates.
If you're already a client of ours via your PSC, you can keep your limited company and transfer to our Umbrella. This is particularly useful if you think future contracts will be outside IR35.