Understanding Corporation Tax: How is it impacted by IR35?

How the reform to the off-payroll working rules could affect the cost of running a business and impact upon corporation tax

The off-payroll rules have yet to be introduced, having been delayed due to the Coronavirus pandemic. The introduction of IR35 reform into the private sector has been complicated, to say the least, but we now know with certainty that the rules are going to be implemented from April 2021, having been officially approved and added to the 2020 Finance Bill.

 

If I am deemed to be an employee, what happens to the cost of running a business?

Remember that under the off-payroll reforms, the end client will be responsible for determining the employment status of all of its off-payroll workers. Where the end client considers your working arrangements to be in line with employment, PAYE & NICs will have to be deducted at source from the income received, and there will be no entitlement to any employment benefits.

Whilst income tax and NICs may have been deducted by the fee-payer in your engagement, if you are still operating through your limited company, paying employment taxes does not change that fact. You are still operating through a corporate entity of which you remain fully responsible for managing. There will therefore still be a requirement to cover all the operating costs of your business, such as accountancy fees, and for paying the relevant corporation tax at the end of the accounting year.

The same applies to VAT, even if the engagement is within the off-payroll working rules. This is because it is still the intermediary that is contracting to provide services to its clients. As such, the supply remains within the VAT regime.

 

Should I still keep my limited company open?

Many contractors being forced to operate inside of IR35 due to the off-payroll reform will question the virtue of keeping their limited company open, particularly if their contract with the end client is lengthy.

However, for those contractors with short term contracts and those who undertake multiple contracts for multiple clients, it is worth considering keeping your company open. Whilst some contracts may be considered to fall inside of IR35, some may not, and it is possible to undertake a combination of inside vs outside of IR35 contracts through the same limited company. You should remember that 91% of individual assessments undertaken here at Qdos via the Qdos Status Review service are outside IR35. Working under engagements that are outside of IR35 is by no means impossible.

 

How is Corporation Tax calculated where contracts fall inside of IR35?

If you are determined inside of IR35 by your end client, employment taxes will be deducted at source by the fee-payer in that engagement. However, as indicated above, this does not change the fact that if you are still operating through your limited company, corporate responsibilities will remain. This means that you will still be required to pay Corporation Tax.

When calculating Corporation Tax, the deemed employment payment and Class 1 Employer NICs can be deducted, so this will reduce your Corporation Tax bill. See HMRC guidance on this below.

“When calculating Corporation Tax liability, your intermediary/the fee payer can deduct the amount of the deemed employment payment and any Class 1 employer’s NICs due on it. This deduction is only allowed when you calculate the taxable profits for the accounting period in which the deemed employment payment is treated as paid.”

If you’ve only ever worked on contracts which fall inside of IR35, there may not be any Corporation Tax to pay. However, for those contractors who have worked on contracts which have been deemed to fall outside of IR35 prior to the implementation of the off-payroll reform, there is likely to be some Corporation Tax to pay. It appears that the Treasury may be looking to increase the Corporation Tax rate from 19% to 24% as part of its plan for the Autumn Budget, to meet the ever-increasing costs of COVID-19.

 
With over 25 years’ experience, Qdos provides a range of trusted insurance policies for freelancers, contractors and the self-employed - from IR35 insurance through to professional indemnity insurance.