The off-payroll working rules were extended to medium and large private sector clients on 6 April 2021. The change had been set for 6 April 2020 and was deferred by a year on 17 March 2020. It is worth keeping two things apart. IR35 itself dates from 2000 and puts the assessment on the worker’s own company. The off-payroll rules move that assessment to the client, and the duty to deduct tax and National Insurance to the business that pays the worker’s company, usually an agency or the client itself. They began in the public sector on 6 April 2017 and reached the private sector in 2021.
If this is going to affect your limited company and you feel closing it may be appropriate, read on to learn more about the process.
What Does IR35 Mean for Contractors?
In an effort to tackle tax avoidance by employees posing as contractors, HMRC’s sweeping IR35 reforms are now referred to as the ‘Off-Payroll Tax’, partly because the original tax received such bad publicity.
The key points to understand is that if you’re a genuine freelancer or contractor working outside IR35, you should not face an IR35 liability. HMRC can still open an enquiry, so keep evidence of how you really work. If, however, you an employee who has set up a limited company to reap the tax benefits, these changes are likely to catch you.
HMRC looks at the written contracts between your company, the client and any agency, and also at how the work is really done. Where the day-to-day reality differs from the paperwork, the reality counts. There are various criteria HMRC have for establishing whether any particular candidate warrants closer investigation. If they are opening an IR35 enquiry into your case you will get a letter informing you, which will ask you to clarify your situation.
How to Close Your Limited Company in Preparation for IR35?
Which process you use to close the company depends mainly on how much will be paid out to shareholders. If that total is more than £25,000, a Members Voluntary Liquidation, which we’ll discuss further down the page, is usually the more tax-efficient route.
If the total is £25,000 or less, dissolving the company is often the simpler option. The payout can then be taxed as capital, provided the company has collected, or intends to collect, what it is owed and has paid, or intends to pay, its debts.
In either case the accounts should be reconciled and up to date. For a strike-off, the law does not require the debts to be cleared before you apply, but settle them first, because creditors can object. For a Members Voluntary Liquidation, the directors must be able to declare that the company will pay its debts in full, with interest, within a stated period of no more than 12 months. The liquidator then pays them.
Closing Your PSC with a Members Voluntary Liquidation
A members voluntary liquidation (MVL) is the usual way to close a solvent limited company with more than £25,000 to pay out to shareholders, though striking off remains a lawful alternative.
If the company is struck off instead, money paid out to shareholders beforehand is taxed as capital only if the total is £25,000 or less. Above that, the whole amount is taxed as income, not just the part over £25,000. Distributions in an MVL are normally taxed as capital, subject to anti-avoidance rules. In addition, Business Asset Disposal Relief, formerly called Entrepreneurs’ Relief, may reduce the Capital Gains Tax rate on a qualifying gain to 18% for disposals from 6 April 2026, if the qualifying conditions are met and the lifetime limit and anti-avoidance rules allow. As such, an MVL is usually the most tax-efficient way to close a solvent company with more than £25,000 to pay out to shareholders.
You’ll need the assistance of a licensed insolvency practitioner such as ourselves to complete this process.
Benefits
- Distributions made in the company liquidation are normally subject to capital gains rather than income tax. They can be taxed as income if, within two years, you carry on the same or a similar trade or activity, for example through a new company or as a sole trader, and avoiding income tax was a main purpose of the winding up
- Business Asset Disposal Relief can reduce the Capital Gains Tax rate on a qualifying gain to 18% for disposals from 6 April 2026, if the conditions are met and the lifetime limit and anti-avoidance rules allow
Dissolving a Personal Services Company
A company can apply to be struck off, or ‘dissolved’, only if in the previous three months it has not changed its name, traded or otherwise carried on business, made a disposal for value of property or rights it held to sell at a profit in the normal course of its business, or engaged in any other activity (other than activity necessary or expedient to apply, conclude its affairs or meet a legal requirement), and it is not subject to insolvency proceedings. The £25,000 figure is a tax limit, not a condition for striking off: it decides whether money paid out beforehand is taxed as capital or income. Dissolving a limited company, also known as dissolution or striking off, refers to the formal process by which you can close down a company, removing it from the register at Companies House.
The process is a follows:
- Bring your accounts up to date, plus a company tax return
- Contact the relevant HMRC departments for VAT, Corporation Tax and Payroll to let them know you’re closing
- Close bank accounts
- Download the DS01 Form which is the ‘ Striking off application by a company’
- Pay the Companies House application fee, £13 online or £18 on paper as at 18 August 2026
- Within seven days of applying, send a copy of the DS01 to every member, employee, creditor (including HMRC if tax is owed), director who did not sign it, and pension fund manager or trustee. Failing to do so is a criminal offence, unless you took all reasonable steps to send the copies.
Can I Wind Up My Limited Company Because of IR35, and Start a New One?
A contractor, concerned that his last contract would fail an IR35 Investigation, recently asked is if it would be prudent to close his company, on the basis that a dissolved company might be immune to IR35 investigation. The truth is that HMRC are notified of any company strike off and, given enough suspicion, could object to the strike off or, as a creditor, apply to the court to have the company restored to the register in order to recoup what they’re owed.
It’s always wise to follow due protocol with HMRC, their supercomputer ‘Connect’ was designed by a military contractor and has great capabilities to spot possible discrepancies and irregularities. Closing a PSC with the specific intention of avoiding tax liabilities could cause anyone much more serious problems than the ones they were trying to avoid, including tax evasion charges.