April 6th 2020 is the date when the IR35 reforms, previously rolled out across the public sector in 2000, will be extended to private companies.
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, you have nothing to be concerned about. 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 isn’t interested in your employment contract as the key criteria for establishing whether you’re an employee or not, so much as the actual nature of the working relationship you have. 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 on its size. If you have retained profits of over £25k, you should use the Members Voluntary Liquidation, which we’ll discuss further down the page.
With retained profits of less than £25k, dissolving the company will be a preferable option.
In either case you’re going to need to settle any debts, plus ensure the company accounts are fully reconciled and up to date.
Closing Your PSC with a Members Voluntary Liquidation
A members voluntary liquidation (MVL) is the correct way to close a solvent limited company with assets.
While current law specifies that any distrubitions in excess of 25k are to be treated as income in the shareholders hands, an MVL allows it to be taxed as capital. In addition, what is known as ‘Entrepreneurs Relief’ means this might even be reduced down to 10% if the right criteria apply. As such, MVLS are the most efficient way to wind down a solvent company.
You’ll need the assistance of a licensed insolvency practitioner such as ourselves to complete this process.
- All distributions made in the company liquidation will be subject to capital gains rather than income tax
- Entrepreneurs Relief offers even greater benefits, reducing tax liabilities to 10% if conditions apply
Dissolving a Personal Services Company
If there is less than £25k in the company then you can ‘dissolve it.’ 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 an application fee of £10 to Companies House
- Make sure you send a copy of the DS01 to anyone who might be affected, such as employees, members, directors who haven’t already signed it.
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 either object to the strike off and even reinstate it at Companies House 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.