Member Article

Beware the perfect storm of IR35 and bounce back loans

NEW regulations from HMRC will have a major impact on the way contractors and off-payroll workers function and pay tax, Sheffield financial expert Deborah Lockwood has warned.

The government’s IR35 rules apply to people who provide their services through their own limited company or another type of intermediary to the client.

The rules make sure that workers who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as formal employees.

But changes to the system now coming into place will affect not only the individuals but also the clients who engage their services.

Adding to the complexity of the issue is the fact that this group of people has been badly affected by the Covid-19 pandemic and will now face not only the problem of IR35 changes but will also be expected to start paying back bounce back loans that were intended to see them through the crisis.

“There were several high profile cases, many involving people in the media industry, that really brought this issue to the forefront,” said Deborah, a partner in Sheffield insolvency and business turnaround company Graywoods.

“The pandemic then started to dominate the headlines but as lockdown starts to ease, self employed people who assumed limited company status are once again having to face up to the much stricter rules.

“And people who were struggling so much that they sought refuge in bounce back loans are now looking at a much bigger financial problem.

“Bounce back loans were made available in March last year at a time when nobody really anticipated that the lockdown would last so long or create such upheaval in the economy.

“A year later, though, that prolonged period of upheaval is taking its toll and many people who took out the loans are now facing the tough reality that they don’t have the means to begin a proper repayment programme..

“Contractors who were in a solvent position 12 months ago have found themselves with no money coming in and have been relying on funds from the company to meet daily living costs.

“Many have historically taken remuneration as dividends but in the past year, when many companies have not made a profit, the directors, who are also often shareholders, now find themselves in a position where there is an overdrawn loan account. In short, they owe the money back to the company.

“Many directors/shareholders often fall in to the trap of thinking of their dividend payment as normal remuneration. In reality it is a shareholder dividend which still has tax to be paid on it.”

The combination of changes to the IR35 rules and the demands of paying back loans, Deborah said, were now creating a perfect storm for struggling individuals.

“It is imperative that directors, before making any decisions on the question of solvency or insolvency, have a full understanding of their financial situation,” she said.

“That’s not just a question of looking at the last set of accounts but bringing figures right up to date because in just a matter of months some directors could find they face debts of thousands of pounds because they have incurred liabilities as a result of the past 12 months that they could not have anticipated previously.

“They need to be having serious and detailed conversations with their accountants because what we are seeing is that some directors think that all they will have to do is pay a small fee to liquidate the company and that will resolve their problems - but that is definitely not the case.

“And they also need to seek sound professional advice before committing to a lasting course of action like opting for insolvency.”

This was posted in Bdaily's Members' News section by John Highfield .