Contractors' Questions: How to park my limited company tax-efficiently?

Contractor’s Question: As a limited company contractor, what is the most tax-efficient course of action if I wish to take a permanent/full-time job for a year or two, but wish to continue having a limited company that I return to afterwards? I want to keep my limited company because I know that, after the two-year job, I will want to revert to temporary IT work.

I don’t think it would be better to close down my limited company only to then start another once my ‘permie’ time is complete, partly due to the hassle involved. Presumably, I could just ‘park’ my limited company and come back to it later on. It won’t be trading in the two years I’m working as a direct employee, so I don’t imagine it would be a problem to me, financially, or to HM Revenue & Customs, in terms of tax, as they’ d be nothing to pay.

Expert’s Answer: It is perfectly acceptable to park the company. Although you will still need to file an annual return to Companies House and annual accounts to HMRC, the costs involved in keeping the company running should be fairly small as there will be no bookkeeping required, assuming you have not traded.

As corporation tax is only payable on company profits, there will be no tax to pay. You should also consider de-registering for VAT and PAYE if applicable. As you will have nil returns to submit, this can help to reduce the compliance requirements (and associated costs if using an accountant). However, while the costs involved in maintaining the company will be fairly small, these will not give rise to a tax refund as they can only be offset against income, rather than create a loss.

Your annual accounts would be filed exactly as before but there will be nil values and the business description will be ‘not traded’. You will need to bear in mind the dates of trading, particularly when you start your permanent role and later recommence contracting. If during the companies accounting year any trading takes place, you will have to submit a full set of accounts. Therefore, if you commence a permanent role part way through the year you will need to submit a full set of accounts for that year and conversely, when you recommence contracting, you will need to be aware of when your new accounting year starts (i.e. it could be worth waiting an extra few weeks if you are in the final month of your accounting year before starting your new contract).

We understand each person’s situation is different and there can be circumstances in which permanent PAYE roles give a better lifestyle. That being said, as specialist tax advisers and consultants, we do point out that PAYE is one of the preferred ways for the Revenue to extract tax from the taxpayer.

The expert was Martin McKechnie, a director at the Low Tax Group, a specialist accountant for contractors and one-person businesses.

Wednesday 4th July 2012