While the nation has been gripped by Brexit over the past three years, another hot topic for those in the contracting sector is the impact of the new off-payroll legislation, otherwise known as IR35. In particular, its ramifications when it’s rolled out to the private sector in April 2020.
We know that when the reforms hit the public sector in 2017 many public-service hirers put all contractors inside IR35 to avoid any comeback. Come April 2020 the same could happen.
Faced with being deemed an employee and unable to continue working through their own personal service company (PSC), many contractors will consider their options. Some could choose to work through a different model, such as an umbrella, but many contractors may decide to shutter their limited personal service company and pursue alternative paths.
So, how do you wind up your personal services company ahead of IR35 coming into effect next April?
‘Start the MVL conversation with your accountant now’
Voluntary strike off
A contractor closing a business can apply for voluntary company strike off at Companies House but a Members’ Voluntary Liquidation (MVL) may be more appropriate. A strike-off request could be turned down if a business has creditor agreements in place, has traded over the last three months, or has changed names over the last three months.
What is a Members’ Voluntary Liquidation?
An MVL is a process used to wind up the affairs of a solvent company and typically used where a company has come to the end of its life – IR35 will undoubtedly prompt such a process but retirement or entering full-time employment could also be valid reasons to close a personal service company.
The process of an MVL facilitates a controlled exit, enabling shareholders to realise any investment in a tax efficient and advantageous way. Money distributed to shareholders represents a return of capital, on which capital gains tax is payable. Capital gain is the gain in the value of the shares compared with the amount which the shareholder paid for them. Where the assets of a company are more than £25,000, any capital distribution can only be carried out by a liquidator. The advantage for contractors is that money received as a capital distribution may qualify for entrepreneurs’ relief. However, the shareholder must own at least 5pc of the shares for at least one year prior to liquidation and any assets must be distributed within three years.
>See also: HMRC under fire over IR35 off payroll consultation
How to close down a company
It is important to apply to Companies House using a DS01 form, which contractors will need to complete to start the process to close down a company. Any co-director, such as a spouse, will also need to sign the form.
Any shareholder, creditor, trader, insurance company and bank will need to know about the plan and be sure that a contractor has no outstanding payments due to HMRC, such as corporation tax, VAT, NICs and, if applicable, PAYE. All paperwork should be forwarded to HMRC along with a final set of accounts from the date of a contractor’s last set of accounts to the final trading day. Contractors must also inform HMRC to cancel any VAT registration, which could take up to three weeks to be confirmed, and submit a final company tax return which covers the period from the last tax return to the final day of trading, taking account of VAT on stock and business assets.
It is important to extract any retained profits as a final dividend before any liquidation process begins. How a contractor takes this will depend on the exit route chosen and how much profit is left in the business. An MVL is the most tax-efficient method once the tax savings made from entrepreneurs’ relief has been factored.
>See also: How UK businesses should cope with incoming IR35 rules
What about capital gains tax?
If the profit held in the company is under £25,000, shareholders pay capital gains tax. However, if a contractor is eligible to apply for entrepreneurs’ relief, he or she would pay a tax rate of 10pc regardless of the rate of personal tax paid.
If the profit held is above £25,000, the distributions will be deemed as income and subject to income tax and the income is typically taken out as a final dividend, not as salary.
Private sector IR35 reform is looming and plans should be put in place now to navigate the solvent liquidation path smoothly and painlessly. My advice to contractors is to start the MVL conversation with your accountant now and help to take the pain out of a process that doesn’t need to be daunting.
John Bell is a chartered accountant and insolvency practitioner. He founded Clarke Bell in 1994 and, to date, the company has conducted over 1,800 MVLs.
Further reading on IR35
Government fails freelancers as it presses for IR35 rules