IR35 - As a contractor, what IR35 Solutions are there to choose from?

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Her Majesty's Revenue & Customs (HMRC) have closed a number of loopholes that previously allowed contractors to minimise their tax and National Insurance contributions (NICs). They continue to investigate some of the practices used by contractors and may examine your individual contracts. Therefore, as a contractor you need to be very careful when you choose your payment solution. Traditional options have included:

Limited Liability Partnership - IR35 Solution

Consisting of several contractors formed under company law, a Limited Liability Partnership reduces NICs by saving employers' contributions and offers greater flexibility in terms of expenses.

Umbrella Company - IR35 Solution

Contractors are paid via PAYE and benefit from an HMRC approved dispensation for expenses. If a contractor is outside IR35 this is a less tax efficient solution.

Composite Company - IR35 Solution

Legislation introduced in April 2007 to prevent what the government viewed as 'tax evasion' means that this option should not be pursued. This type of company offered administrative and payroll services, paying a small salary plus expenses with the remaining income paid via dividends.

Personal Service Company - IR35 Solution

The sole director/shareholder/contractor is paid via a small salary, dividends and expenses. HMRC can challenge this method if it is felt stipulated procedures are not being followed, so this is a risky option and is not appropriate for contracts inside IR35.

Managed Service Company - IR35 Solution

Under new legislation this type of company can only pay contractors on an employed basis with limited allowance for expenses. Agencies working with a managed service company now run the risk of liability for any unpaid PAYE or NICs

Bonus Scheme - IR35 Solution

Income is received in the form of a low basic salary and several bonus payments, all of which are subject to PAYE. Whilst reducing the employee's NICs on the bonus and deferring payment of some taxation, for contractors inside IR35 contracts the deferred taxation is subject to PAYE, resulting in a less tax-efficient solution.

Offshore Scheme - IR35 Solution

Money is held in offshore funds with payments made in the form of distributions, loans and dividends. UK residents must declare this income which is subject to taxation and IR35 criteria.

Foreign Currency Loan - IR35 Solution

These work in conjunction with an offshore company and are a way of avoiding tax and NICs with repayments made at a very low rate, resulting in a tax-free gain. Such companies are closely scrutinised by HMRC and all dealings involving a UK resident would be taxed as income.
Employee Benefit Trust - IR35 Solution

Once an attractive option as it avoided IR35 and taxation, this type of scheme can no longer operate after HMRC closed the loophole it exploited. Contractors were paid a low basic salary with the balance paid into an offshore trust from where it was loaned back.
PAYE

Contractors work through an employment agency receiving all income via PAYE thus avoiding the entire IR35 issue. However, by paying the agency's fee contractors receive less than they would using a dedicated payment solution and may be missing out on other benefits and allowances.

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