Contractors who like saving tax won’t want to miss HMRC’s three-year winding-up window

Contractor Personal Service Companies (PSCs) get closed down for many reasons, whether it’s as part of retiring, a change of career or taking a salaried role. The trick is to tie off all those irritating loose ends, to maximise the residual cash and to minimise the tax liability in the process, writes Nick Hood of Opus Business Advisory Group.

Sometimes, the PSC lingers quietly on while the contractor moves on to whatever their ‘pastures new’ may be, and the job of giving the company a decent burial slips down their task-list.

Take action and take it promptly

Before you know it, a couple of years have passed and now, with the clock ticking, there’s a very good reason to take action and take it promptly.

Assuming the PSC is solvent and can pay all its liabilities, there may be cash left over which needs distributing to the shareholders. Anything over the Capital Gains Tax annual allowance (recently cut from £12,300 to only £6,000) will attract Capital Gains Tax at 20%, unless the contractor claims Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief. Cash taken back this way only attracts tax at 10% up to a lifetime limit of gains of £1 million, so there can be substantial tax savings to be had.

Make the three-year window

The rules surrounding BADR are fiendishly complicated, but one in particular is absolutely relevant to getting on with winding up your PSC and distributing whatever cash is left over. The claim for BADR has to be made within three years of the company ceasing to trade, so the countdown begins from the moment you and it stop doing business.

This is undoubtedly all done the most safely by putting the PSC into solvent liquidation through a Members Voluntary Liquidation (MVL). Generally, this is a relatively quick task, provided that the appropriate preparatory work is done under the guidance of an insolvency practitioner to get the company tidied up ready to be liquidated.

A stumbling block, a struggling HMRC, and a wheeze to avoid

Unfortunately, one stumbling block can be getting tax clearance from HMRC that all PAYE, VAT and any other tax liabilities have been agreed and settled to HMRC’s satisfaction. Anecdotal evidence suggests that HMRC are now struggling to cope with giving clearance in any reasonable timeframe, because of staffing cuts and other greater HMRC priorities elsewhere. So the sooner an insolvency practitioner is called in after the PSC has ceased trading and the MVL process started, the better. It would be shame to miss out on HMRC’s generosity with BADR!

Crucially, this tax-saving route is not possible if the PSC has liabilities it can’t pay, which right now is prompting a few contractors to consider going through a phoney restructuring -- by transferring any assets to another or a new PSC and just collapsing the old PSC by applying to have it struck off by Companies House (without going through any insolvency process). This is an absolute no-no, with all sorts of potential pitfalls and personal liabilities for the directors, including the risk of being disqualified from acting as a director for up to 15 years. Yes that’s not a typo, FIFTEEN years. So this wheeze just ain’ worth it.

Final BADR thoughts

Almost needless to say, what is of vital importance is to get and follow proper professional advice before taking any action after you stop using your limited company/PSC. Making a BADR claim is not straightforward and assessing whether the company should go down the MVL or insolvent liquidation is sometimes a complex matter involving considerations a lot of contractors may not immediately think of, such as potential ongoing liabilities on a premises lease or equipment financing deals. This is very definitely not something to be attempted off the back of a deep research dive down some internet rabbit hole, nor on the basis of what a friend down the pub tells you. So the very best of luck, contractors, with putting your PSC to bed properly – even tax-efficiently – but remember, it is only your PSC you’ll want to put to bed, not your chances of being a director in the future.

Thursday 1st Jun 2023
Profile picture for user Nick Hood

Written by Nick Hood

Nick has been an insolvency professional for over thirty years. He specialises in the owner-managed SME sector. He’s committed to finding positive solutions to business problems.

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