How Do I Close a Company Due to IR35 Reforms?
Closing a company down is a big decision often driven by various factors. One such factor is the IR35 regulations, designed to tackle tax avoidance. These rules have had a major impact on how businesses, particularly limited companies, operate in the UK.
This article aims to provide a comprehensive guide for business owners who find themselves considering the closure of their company due to IR35 compliance challenges. We will walk you through the legal requirements, financial implications, and practical steps needed to wind down your business in an efficient and compliant manner.
Are You Clear on Your IR35 Status?
Before proceeding with the closure of your company, it’s essential to have a firm understanding of your IR35 status. The IR35 legislation is complex, and its application can vary significantly depending on your specific circumstances.
Several online tools and checklists are also available to give you a preliminary idea. However, these should not replace professional advice. Keep in mind that HM Revenue & Customs (HMRC) has been known to challenge IR35 statuses, and the repercussions of being wrong can be severe.
Once you’re clear on your IR35 status, you can make an informed decision about whether closing your company is the most suitable course of action. Being certain about your position will also allow you to prepare more effectively for the closure process, taking into account any tax liabilities or reliefs that may apply.
Who is Liable?
In terms of IR35, the liability for determining the employment status and ensuring the correct taxes are paid rests differently depending on the size of the end client:
- Small Businesses: If your company contracts with a small business in the private sector, the responsibility for determining your IR35 status lies with your own company.
- Medium and Large Businesses: For contracts with medium and large businesses, the end client is responsible for determining your IR35 status. If they deem you to be inside IR35, the fee-payer (which could be the end client, a recruitment agency, or another intermediary) is responsible for deducting Income Tax and National Insurance Contributions before paying your company.
- Public Sector: In public sector contracts, the end client is always responsible for determining your IR35 status. The fee-payer is liable for making the appropriate tax deductions.
You would know your liability through the Status Determination Statement (SDS) provided by the end client if you’re working with medium, large, or public sector clients. This statement should outline whether you fall inside or outside of IR35 and the reasons for that determination. If you contract with a small business, it’s your company’s responsibility to determine its own IR35 status.
How do I close my IR35 business?
A Personal Service Company (PSC) is a limited company set up to provide the services of a single contractor.
There are two ways to close a solvent PSC:
- Members’ voluntary liquidation (MVL): If the company has more than £25,000 in retained profits, MVL is usually the best option from a tax perspective.
- Dissolving the company yourself: If the company has less than £25,000 in retained profits, you can dissolve it yourself through a process called voluntary strike-off.
If you dissolve the company yourself, you will have to pay Capital Gains Tax (CGT) on any profit. The exact amount of CGT you will pay will depend on your personal income tax rate.
Here is a table that summarizes the two methods of closing a solvent PSC:
|Method||Retained profits||CGT implications|
|Members’ voluntary liquidation||More than £25,000||No CGT payable|
|Voluntary strike-off||Less than £25,000||CGT payable on any profit|
Closing Down a Solvent PSC with Retained Profits: Members’ Voluntary Liquidation
When a solvent company with assets has more than £25,000 in retained profits, members’ voluntary liquidation (MVL) can be a tax-efficient way to close the company.
MVL requires the assistance of a licensed insolvency practitioner (IP). The process is as follows:
- Settle all company debts.
- Deregister for VAT, PAYE/NIC, and Corporation Tax with HMRC.
- Ensure that all company accounts and returns are filed up to the final date of trading.
- The director makes a declaration of solvency.
- The shareholders vote on the decision to liquidate the company.
- A licensed IP is appointed and their appointment is advertised in the Gazette.
- The IP takes control of the company and the directors’ powers cease.
- The IP sells and converts all company assets into cash and distributes the proceeds to the company members.
- Once the liquidation is complete, the company is dissolved and struck off the register at Companies House.
Dissolving a Personal Services Company
Here is a step-by-step guide to dissolving a PSC through voluntary strike-off:
- Check that you are eligible for voluntary strike-off. To be eligible, your PSC must:
- Be solvent, meaning that it has enough assets to cover its liabilities.
- Have no outstanding debts to creditors or HMRC.
- Have filed all of its annual accounts and returns with Companies House.
- Have no outstanding legal proceedings against it.
- Complete the DS01 form. This is the application form for voluntary strike-off. You can download it from the Companies House website.
- Send the DS01 form to Companies House. You must also send a copy of the form to all of the company’s directors and shareholders.
- Wait for Companies House to approve your application. Once your application has been approved, Companies House will publish a notice in the Gazette. This gives creditors and other interested parties a chance to object to the strike-off.
- If there are no objections, Companies House will strike off the company from the register. This will usually happen within three months of the notice being published in the Gazette.
Once the company has been struck off, it will cease to exist. You will no longer be able to trade under the company name and you will be personally liable for any debts or liabilities that the company had at the time of strike-off.
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 the fraudulent activity of tax avoidance is concerned, they can go back 20 years.
Alternative Solutions: Is Closure the Only Option?
Closing a company is a significant move that comes with both financial and emotional costs. Therefore, before taking such a step due to IR35 regulations, it’s worth exploring alternative solutions.
- Contract Re-negotiation: If your existing contracts push you inside IR35, you might consider renegotiating the terms. By altering elements related to control, substitution, and financial risk, you could potentially move outside IR35.
- Switch to PAYE: For those who find themselves within the scope of IR35, switching to a Pay As You Earn (PAYE) scheme can be a viable option. While this would mean paying higher taxes and National Insurance, it avoids the need for company closure.
- Umbrella Companies: Utilising an umbrella company is another alternative. The umbrella company becomes your employer for tax purposes, allowing you to work on various contracts without worrying about IR35.
- Join a Professional Employer Organisation (PEO): Similar to an umbrella company, a PEO becomes the employer of record and takes on the responsibility for tax and employment obligations. This allows you to focus on your work rather than administrative tasks.
- Changing Business Model: You may also consider fundamentally changing your business model to fall outside the purview of IR35. This could involve moving from a service-based model to selling products, or diversifying the portfolio of services you offer.
- Outsourcing: Some companies find it beneficial to outsource certain roles or services that fall within IR35, thereby limiting their exposure to the regulations.
Each of these alternatives comes with its own set of challenges and benefits, and what works for one company may not be suitable for another.