IR35 reform kicker (1): Is it cheaper to wind up my non-earning limited company or keep it active, now I’m in an umbrella?

Many contractor businesses were forced into dormancy with changes to IR35 legislation over the years, making operating a limited company difficult if not challenging.  

These directors were steered into alternative payment solutions such as PAYE and umbrella companies, writes Louise Rayner, founder of NumberMill. 

For owners of non-earning UK limited companies, the choice between closure, maintaining an active company status, transitioning to dormancy, or switching accountants, can significantly impact finances and legal obligations.  

Dormant Company

What does it mean?  

• Your company is still registered, but it's not doing any business. It's like pressing pause on your company's activities. 

• There will be no income and no expenses running through the business. 

Costs involved: 

• The fees involved are not that dissimilar to that of a trading company, however the accounting fees required should be a fraction of the cost of a trading business. 

• There will be no taxes to pay HMRC as the business isn’t trading. 

Legal obligations: 

• Reporting requirements are simpler, but you still need to file some paperwork with Companies House each year. 

Closure of the Company

What does it mean?  

• You're officially shutting down your company and ceasing all activity – you’re winding-up. 

• Any final monies owing would be paid to HMRC, and other creditors before drawing remaining funds out as a capital distribution for shareholders. 

Costs involved: 

• You will require an accountant to complete a final set of statutory accounts and company tax return for submission to Companies House and HMRC. 

• Depending on the size of your business and profits/reserves available, you may be required to appoint a liquidator which can be costly. 

Legal Obligations: 

• There's a formal process to follow for closing down the company, including settling any outstanding debts and notifying creditors. 

Key considerations as an umbrella contractor with a non-earning limited company 

When weighing up the options of retaining your existing limited company in a dormant state while working on other projects via an umbrella, there are a number of factors for consideration exclusive of cost.  

Keeping your business open but in a dormant status will mean that you will continue to pay fees (albeit reduced hopefully), to ensure the business is active -- until a point in the future when you return to trade 

As a minimum, considerations include: 

• Long Term Trading History: Has the business traded for a significant period and built-up substantial trading history? If so, you  may wish to retain the company in a dormant state, as other businesses and particularly lenders look more favourably on established businesses.  

• Future Trading: Is there an intention to return to contracting? Are you actively looking for Outside IR35 contract opportunities? If so, it may be beneficial to retain the limited company as the closure process doesn’t happen overnight, and you could find that the costs/time incurred during closure are avoidable. 

• Company Name: Believe it or not many of our contractor clients have attachments to the company name they chose when starting up, as this may have sentimental value or brand equity/reputational value. Closing your business rather than keeping it dormant puts the company name back out on the market and up for grabs!   

• Costs: These are difficult to estimate in a broad market sense, as accountants have fees that will vary by the size of the client and the work entailed. Therefore, there isn’t a one-size-fits-all fee we’d recommend you look to match. However, you can be assured that a ‘dormancy fee’ from a contractor accountant should be minimal compared to the standard charges you’d face as a PSC. Be wary of keeping your business dormant for too long as this can quickly become an unnecessary annual fee for no future benefit, depending on circumstance. 

Keeping your company active versus dormancy/closure, in a contractor nutshell…

Deciding what to do with your non-earning UK Limited Company involves weighing multiple factors, outside of costs alone. Whether you keep it active, switch to dormant status, close it down, each option has its own implications. Take your time to assess your situation, consider your long-term plans, and choose the option that best fits your needs and objectives. 

If you want help assessing your options, reach out to us for a no-obligation discussion on how to move forward with your business, or at least move forward with your professional journey if not!