HMRC’s wide-reaching IR35 reforms, intended to stop people from using the limited company structure as a means of tax avoidance, have had a huge impact on contracting.
As of April 6th 2020 this legislation will also include the private sector, meaning that the onus will be placed on companies, not contractors, to determine whether a company falls inside IR35 status.
If this situation is prompting you to consider closing your limited company, this article is intended as a guide to the process.
Are You Clear on Your IR35 Status?
It’s important to note that the new rules are changing how IR35 determination works, not IR35 criteria itself. So if you are not currently eligible that isn’t going to suddenly change.
What may happen, however is that some larger companies may implement blanket rules around not employing freelancers working through a limited company.
Who is Liable?
In terms of whether IR35 affects you, the basic question to ask yourself is whether you would classify as an employee if you weren’t invoicing through a company (intermediary).
If so, you will be a ‘deemed employee’, to use HMRC’s terminology, and should therefore be paying National Insurance contributions and income tax, as if you were employed.
Of course, if you are a genuine contractor, you should carry on as normal and not feel concerned. Nevertheless it’s important to understand the legislation in case you receive an enquiry letter from HMRC on the matter.
Closing Down a Personal Service Company
A Personal Service Company is essentially just a limited company set up to provide the services of a single contractor.
There are two ways of closing limited, solvent companies
- If the company has more than £25k in retained profits a members voluntary liquidation makes the best sense from a tax perspective
- With retained profits of less than £25k, you can dissolve the company yourself via the process we explain further down the page.
How to Dissolve a Limited Company: A Guide for Contractors
- Ensure any debts are paid off
- Inform HMRC of your intentions via individual departments such as VAT, Corporation Tax etc
- Ensure accounts are up to date and filed
- Sell any assets, making sure they’re transferred out of company ownership
- Close the company bank account
- Download and fill in Form DS01 from Companies House
- Distribute the DS01 Form to any interested parties (i.e. shareholders, employees, pension managers etc.)
- Pay Companies House admin fee of £10
- Wait for the Striking off acceptance letter from Companies House
What are the Tax Implications of Dissolving a Company?
If your retained profits are less than £25k you will have to pay Capital Gains Tax on any profit. The exact amounts will depend upon your personal income but you can see current figures here.
IR35 Liquidation for Contractors: Members Voluntary Liquidation
When a solvent company with assets has more than £25 in retained profit, the use of the Members Voluntary Liquidation comes with a clear tax advantage.
MVL’s require the assistance of a licensed insolvency practitioner such as ourselves. The process is as follows.
- You’ll need to settle any debts you have
- Deregister for VAT, PAYE/NIC and Corporation Tax by informing HMRC
- Ensure all company accounts are filed, and returns completed up to the final date of trading
- Director makes a declaration of solvency
- Shareholders meeting votes on the decision to liquidate the company
- Licensed Insolvency practitioner is appointed and his/her appointment advertised in the Gazette
- Liquidator takes control of the company, directors powers cease
- Liquidator ‘realises’ (sells and turns into cash) any assets, distributing proceeds to company members
- Once the liquidation is complete, the company is dissolved and struck off the register at Companies House, ceasing to exist
What are the Tax Benefits of the MVL Process
- Capital Gains, rather than income tax, applies. This means a much better tax rate than had the money been treated as dividends.
- Entrepreneurs relief could reduce tax from 18% down to 10%, with a cap at 10 million
Can HMRC Investigate a Closed Company?
Closing down a company does not provide a means to avoid potential HMRC investigations into contracts worked on while the company was trading.
HMRC has the powers known as ‘transfer of debt’ which means it could charge interest, penalties and back taxes should it discover, after the fact, that liabilities are due.
Current legislation allows HMRC 12 months from the date of the final submitted tax return to investigate a company. They can also investigate an individual contractor’s tax affairs for up to 6 years after the company closes. Where fraudulent activity of tax avoidance is concerned they can go back 20 years.