Are you a contractor who is thinking of liquidating your personal service company due to IR35 reforms? If so, you may also be wondering if you will be eligible for redundancy pay.
The good news is that providing you meet the necessary criteria, you may be able to claim redundancy, which could well be extremely useful if you are experiencing financial difficulties.
It could also perhaps be used in part to cover the cost of liquidation and any outstanding expenses, such as tax. Claiming redundancy pay is not going to be possible in all cases, but if you have questions, then take advice on whether it is an option.
Why are IR35 Contractors Liquidating Their Companies?
A personal service company is a limited company of which the contractor will typically be the sole director. For a number of reasons, you may well be thinking this is no longer proving a profitable model because of the restraints of being inside IR35 and so are looking for an orderly closure and a new direction.
This is because many contractors that are required to operate within IR35 have found their earnings have been substantially reduced and this has been compounded by the damaging impact of the pandemic, such as with the loss of contracts.
You may also have experienced communication from HMRC, which has the authority to investigate IR35 contractors’ work procedures, including probing contracts for at least six years to see if rules are being followed. It could be that you want permanent closure of your business and to restructure your business model.
How do IR35 Contractors Claim for Redundancy Pay?
The situation for IR35 contractors can be more complicated and so you may need to seek guidance from an insolvency practitioner before making your claim.
In general terms, you need to have worked at least 16 hours a week and for two years continuously – and to have received at least a small salary via a PAYE scheme.
You also need to show that you had a contract of work, although even if this was not written, then confirmation that you worked in the capacity of an employee rather than as someone who just had a controlling interest, such a non-executive director. You will be required to complete details online via a questionnaire from the Redundancy Payments Office, which is a division of the Insolvency Service. In addition to a statutory redundancy payment. You may also be able to claim other statutory payments such as unpaid wages, notice pay and holiday pay – GOV.UK “Claim redundancy” .
Does Your Company Need to be Insolvent to Claim Redundancy Pay?
It is only possible to claim redundancy pay if your company is going through a formal liquidation process, which is known as a Creditor’s Voluntary Liquidation. This is when a licensed insolvency practitioner is in charge of closing down the business and liquidating with the intention of repaying creditors.
If your limited company is solvent, you can still close it down, which would be through a different procedure – a Members’ Voluntary Liquidation. This is suited to firms that have profits of at least £25,000, although this is a tax efficient mechanism, it does not allow you to claim redundancy pay. Taking advice on which is the right route is essential and your insolvency practitioner will be able to assess your company’s solvency level and advise accordingly.
What if I owe HMRC Money as an IR35 Contractor?
HMRC takes a rigorous approach to ensuring IR35 contractors meet their tax obligations and this includes winding up companies via the courts. If your company is insolvent and you are unable to repay what is owed, then HRMC may look to claw back funds from your redundancy payment – as a creditor, it is entitled to do this.
If you owe more than the redundancy payment, you should be aware that you could then face personal liability to repay debts. This could result in bankruptcy and also, possible disqualification as a director for up to 15 years. HMRC will also look at whether the Director’s Loan Account in your company is overdrawn – as this indicates you have taken money out of the business, outside of salary and dividends. You will therefore need to repay whatever debt exists, so that you can show creditors’ interests are protected.
Do you Need Advice About IR35 Contracting and Redundancy Pay?
The rules surrounding IR35 are complex – GOV.UK “HMRC IR35” – and have resulted in many contractors finding their current work arrangements are no longer viable because of the far higher income and national insurance tax burden. Previously, you may only have been subject to the lower rates of Corporation Tax. They are therefore looking to change their business models to ensure they are able to work outside of IR35.
This is why closing your existing company and claiming director redundancy pay, if this is possible, may help ensure you are well placed for the future. Company Debt’s insolvency practitioners have experience managing IR35 matters, including if HMRC has been in contact with you about unpaid tax or a possible investigation. With our knowledge and support, we can help you make the right choices for your particular circumstances.
All Company Debt insolvency content is written by our licensed insolvency practitioners.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy here.