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What us the future for contractors using limited companies?

Seems like the uncertainty over the tax status of limited company contractors is coming to a head.

Prism the umbrella company are calling for the government to recognise contractors as a new self employed category. The government has historically preferred to try and treat them as employed using the IR35 Intermediaries legislation,

In practice this hasn’t been effective due to a lack of resources but this may be about to change given HMRC’s plans to introduce a new IR35 test and also to apply legislation to  public sector contractors on a compulsory basis from April next year which will effectively treat them as employed and negate the benefit of trading through a limited company. HMRC are also collecting information through Intermediary reporting by agencies so are better equipped to target companies in the private sector as well.

Given the above I think Prism are being rather optimistic. It seems like limited company contractors could generally be heading for the worst of two worlds with the tax and national insurance liabilities of the employed and the risk and financial uncertainty of the self-employed. The new IR35 test to be introduced by HMRC in October will provide clarity for private sector contractors but is likely to be slanted in HMRC’s favour in terms of determining status. We await this with interest.

Time will also tell what the effect of the governments’ new proposals will be from a commercial viewpoint. One scenario is that the best limited company contractors will be offered jobs within the organisations they are engaged by with others being asked to collaborate and set up businesses through which to deliver combined services.

Agencies may in turn look to make more use of umbrella companies as they unlikely to want to get involved with determining tax status. One thing is certain, the government is determined to address the issue of personal service companies being used to avoid tax and national insurance.