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Does forming a new PSC impact IR35 compliance?

Does starting a new PSC have any bearing on my IR35 compliance?

Q. I recently closed my limited company due to the expected arrival of IR35 reform on 6th April. However, given the changes have now been delayed by a year, I wonder, in the context of this postponement, would it be seen as reasonable and more importantly, compliant, to open another limited company and offer my services through this for another 12 months? 

A. Technically, there’s nothing stopping contractors from forming a new limited company to work through if they had wound theirs down in anticipation of IR35 reform. If HMRC was to open an IR35 enquiry, bear in mind that you’ll need to be able to justify why you closed your company and then opened another one. In this scenario, it does sound as though you have a legitimate reason for doing so. 

We’re also working off the basis that you had not been working inside IR35 via your recently closed limited company. If your client placed you inside the legislation in preparation for reform (which was then delayed) only for you to close down your company and open another to then work outside the rules for another year, it could become more difficult to defend your IR35 compliance in the event of an enquiry. 

Ultimately, what matters is that the service you provide to your clients is a genuine business to business engagement, assuming your IR35 status is set to outside. Forming a limited company purely with the intent to operate through it for one year should, theoretically, be of little relevance to HMRC, providing you are working compliantly with the IR35 legislation. 

As a genuine contractor, your limited company isn’t a vehicle for avoiding tax. It’s a legitimate business that you, as the Director, have control over and one that you can work through for as long as you wish to. Like hundreds of thousands of other contractors working in the private sector, you have the power to decide if your contract belongs inside or outside IR35 for another 12 months. Whether you choose to continue operating as a contractor and through your limited company after April 2021 is up to you. 

It’s also worth taking into consideration that the private sector now has one more year to prepare for the changes. In theory, this should mean businesses will be better placed to make well-informed status decisions that allow contractors to work outside IR35. In other words, you may not need to close down your company if and when the changes are enforced next year. That said, this is something you can decide further down the line.

This answer was provided by IR35 specialist, Qdos Contractor.

By Contractor Weekly

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1 thought on “Does forming a new PSC impact IR35 compliance?”

  1. Avik

    Please can you expand this article to include if Entrepreneur Relief has been availed while closing original LTD company then would that be considered Tax avoidance and HMRC will consider whole distribution sum as taxable salary/dividend and hence it would be a huge tax bill if distribution amount was huge.

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