Contractors’ Questions: Does winding-up my contractor company every few years keep me off HMRC’s radar?

Contractor’s Question: As part of advice I received concerning a personal injury matter, a lawyer involved in the matter expressed surprise at my company formation dating back to 2013, saying I should have disincorporated and set up a new company, “twice”, given that my limited company is “old.” Actually, my PSC turns 10-years-old next month.

The lawyer suggested that setting up an entirely new venture, with different name, Companies House number and the like, every five years or so has some bearing on IR35, or helps with HMRC. That's the case, the lawyer claimed, even though I'd continue providing the same services, barring a training secondment we will go on for most of 2024.

Concerning HMRC, I'd still need to self-assess in this recommended new company of ours. So would not the tax office -- in sight of my 'before and after' tax/income records -- be likely to deem this new incorporation a ruse? Even though I'm not exactly sure why I would be undertaking the ruse. Any guidance appreciated!

Expert’s Answer:  I’ve encountered this question a number of times – put differently, does closing down your company before or during an IR35 enquiry keep you safe from HMRC?

Closing down your limited company or making your limited company dormant does not automatically mean that the contractor/director of the limited company is protected from an IR35 enquiry, in respect of contracts undertaken while the limited company was trading.

A 12-month window for HMRC

When you close your limited company, you will be required to submit a final tax return to HMRC, showing the income received and expenses claimed by the limited company during its final year of trading. Once this final tax return is submitted, HMRC have up to 12 months from the date of receipt of the return to open an enquiry if they suspect that there are still additional liabilities/outstanding tax and NIC for the limited company to pay.

It’s a common misconception, with the thinking being that if you shut up shop then HMRC won’t bother or can’t start or continue an IR35 enquiry, before claiming any unpaid tax and national insurance contributions due.

In the event of an IR35 enquiry...

And, contrary to what many people may think, HMRC has powers which allow a company to be reinstated if the tax office believes there’s a chance that unpaid tax might be lost.

In the event of an IR35 enquiry, this could be the case. And while it’s rare that HMRC would insist on effectively reopening a company, it doesn’t negate the fact that the Revenue has this power in its arsenal.

If, during an IR35 enquiry, HMRC seeks to re-open the limited company and, following their enquiries, they find that there is additional tax and NIC to pay – if the company does not have the funds to pay any additional liabilities – in extreme circumstances HMRC may try and use a piece of legislation called Regulation 72.

What is Regulation 72?

Regulation 72 enables the transfer of unpaid tax and NIC from the limited company to the employee or director. It should be noted, however, that the likelihood of HMRC being successful in doing this is extremely low, as they would need to show that the contractor had not taken ‘reasonable care’ when considering their employment status and that they had willfully and intentionally not paid the correct tax and NIC.

Also important to stress is that company directors are prevented from forming new companies within a certain timeframe, assuming they’ve closed an old one down and benefitted from Entrepreneurs’ Relief via a Member’s Voluntary Liquidation.

The expert was former HMRC inspector Nigel Nordone, head of tax at Qdos Contractor.