Contractors' Questions: Can I dodge IR35 by winding up?
Contractor's Question: If I know my last contract would fail an IR35 investigation, would it be wise to close my limited company and start a new one, and then carry on contracting?
If I did this, would I be 'immune' from liability under IR35? I think I would because I've read that IR35 is a responsibility of the company, and therefore once a company is struck off, then that is the end of it. But I'm confused because I also read that, generally, HM Revenue & Customs can pursue the director within six years of winding up. Can you advise on the risk of being inside IR35 once I've wound-up a company?
Expert's Answer: Firstly, HMRC has very wide ranging powers and the associated time limits will always depend upon the detail of the individual case. But the range goes all the way up to 20 years. Powers include the transfer of liabilities to individuals. Consideration is also given to cases of fraud and neglect with their new powers using the terms "careless or deliberate behaviour". Acts of avoidance/evasion have very serious consequences.
Any contractor considering closing their company should seek the advice of their accountant, as much will depend upon the extent of any remaining funds in the company and how the closure should proceed. Whatever route is chosen,
it should always be remembered that the action of closing the company has its own risks.
This is mainly because HMRC is automatically notified of proposals to strike off a company and have to effectively give the OK to do so. Once notified, they check across the whole department including local compliance offices. They can then simply object to a company being struck off, so the action of winding up/striking off itself brings the company to the attention of HMRC and can prompt an IR35 investigation. The risks are significantly greater where the company owes any money to HMRC.
If it is assumed that there is no case for HMRC to make an enquiry under its "discovery" powers (where HMRC subsequently becomes aware of something that would materially affect the previously declared tax position), then generally the time limit would be 2 years after the company's closure. This is based on the date the corporation tax return has to be made by and the subsequent enquiry window open to HMRC. National Insurance is subject to the Limitation Act so has a 6-year time limit unless HMRC issues a Protective Writ which effectively extends this period.
From an IR35 perspective, in cases where the contractor continues to provide services to the same client but through a new company, any IR35 investigation into the new company will always bring to light that the services have been provided through different companies in this way. This
fact may impact upon the whole IR35 argument. For example, it will be a fact that 'Joe Bloggs' has been there for 4 years as opposed to the 2 years this particular company has been trading. Most insurance companies recommend continuing with investigation cover for 2 years after closure. It would also be wise to consider beforehand the answer to the question, 'Why did you close that company and start another?
In summary, closing a company does not give immunity from IR35 for some considerable time and may in fact trigger an investigation. If the reason for closing the company is to avoid the correct treatment of a contract under the IR35 legislation, then very serious problems could result under tax avoidance/evasion regulations.
The expert was Kate Cottrell, managing director of Bauer & Cottrell , an IR35 advisor to IT contractors.