Who would want to put themselves through that particular mill!
2020 is not going to be the best year for one-person companies. But maybe you did not have a choice.
You never know, the ball may yet bounce in your favour, but don’t hold your breath. I don’t think we will see a return to a starting rate of corporation tax of 10% or even 0%, but if tax rates generally have to go up, maybe yours will not go up quite so much, if at all.
Reductions in the dividend allowance from £5,000 to £2,000 have impacted the tax efficiency of operating via a limited company but there are still times when working through a company has its tax and other advantages. This is particularly the case if you don’t need to take all the profits out of the company.
So, what does the year ahead hold for you?
IR35 reforms to the private sector have now been delayed until April 2021 as part of the government’s response to COVID-19. Under the reforms, medium and large organisations will become responsible for determining IR35 status. You will just have to grin and bear it.
I recently read that a House of Lords report concluded that IR35 “has not worked properly throughout its 20-year history” and also suggested the government should take the extra time afforded by the delay to “completely rethink this legislation.” But it seems that the government is intent on bringing on the reforms. But with Boris at the helm, anything is possible.
When the rules changed for public entities we saw blanket bans being introduced on using subcontractor in favour of bringing everyone in house on PAYE. I expect we will see the same again in the private sector as larger companies decide not to take the risk of either having to stomp up to HMRC if they get it wrong or suffering the potential reputational damage. This will limit the market for the one man company. But, it not every company will take this approach.
National Insurance contributions
Rishi Sunak said in March that “If we all want to benefit equally from state support, we must all pay in equally in future”. Does this mean a major reform of National Insurance for sole traders and partnerships, who may have to pay a lot more NI in the future. What if the NI rates for self-employed mirrored the combined employer and employee rates for employees. Could we see Class 4 NIC rates as high at 20% or more? That could be painful and make one man companies a lot more attractive despite IR35.
After the last few months I do not think anyone would argue that we live in uncertain times. It is bad enough trying to get your business back on track without all the uncertainty about what the tax regime may look like going forward.
I think the advice here is not to ditch your one man company just yet.
One man companies do not get the benefit of the employment allowance to mitigate employers’ national insurance, but that is easily circumnavigated by making your wife or husband a director. That might not work for everyone. However, if you are still on a small salary and dividend profit extraction strategy, it is not a problem anyway.
Making Tax Digital
Making Tax Digital for VAT came into effect for the majority of businesses with taxable turnover above the VAT registration threshold (£85,000) in April 2019.
An HMRC report noted that that “a large proportion of businesses and agents have successfully transitioned to MTD without any issues.” However it also had to agree that “there were others who reported difficulties in the early stages, particularly in signing up to the service and choosing a software provider.”
When it comes to it, Making Tax Digital for VAT is now a fact of life and we all have to live with it. It will no doubt be rolled out to other taxes in due course but not apparently in this year, and it seems unlikely but not impossible that anything will happen next year.
So MTD is here for every business. It is not really a factor in deciding whether to operate through a company or not.
Although Covid-19 measures are short term in nature, they unquestionably have an impact on one-person companies.
The government has announced several measures as part of its response to Covid-19, including the Self-Employment Income Support Scheme (SEISS) and the Coronavirus Job Retention Scheme (CJRS).
As a director of a one man company you can furlough yourself but as profit extraction from a one-man company is generally based on taking a low level of salary, which is supplemented by dividends, this has meant in practice that the amount of grant available to such individuals was very low.
Do you get the impression that the government does not like one man companies using low salary and dividends to mitigate national insurance and save tax. Think of it this way. Many of us have mitigated the tax leakage from our companies over many years. We are therefore not HMRC’s favourite customers so why should they do us any favours? Overall, we are probably still better off, just not this year because of the grants
Is it worth incorporating? Should you dis-incorporate?
The answer is … it depends. There are so many factors involved and tax is just one of them. For many one man companies, they have to incorporate or the hirer will not take them on. This is going to change and that is all about IR35.
Others want to incorporate for the safety of limited liability. It’s all about protection.
Maybe you want to be able to orchestrate a phased succession, possibly splitting the business you own amongst 2 or more successors.
For the rest of us it’s is all about mitigating tax and national insurance. The changes to the tax regime in the last few years mean that the circumstances when you can save tax and NIC are currently more restricted but that could change very quickly and in either direction.
So, what should you be doing to prepare? Do you know all the factors that could influence your decision? I would say not, so don’t be in too big a hurry to put in place new structures or dismantle your present setup. At the end of the day, if you currently operate a one man company, decisions only become critical if you are put on the spot and given the choice of PAYE or no work.