Should I close my limited company?
Following on from my previous articles on closing your limited company or PSC as a contractor, no doubt readers will be aware that, along with the raised order of priority coming into force from April 2020, HMRC will extend the reach of IR35 reform to cover contractors working in the private sector.
As a result, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency. contractors will no doubt be considering the question once more – ‘Should I close my Limited Company?’
1. What are the changes to the IR35 rules?
The crux of the rules is that from the start of the next tax year, assessment of a contractor’s deemed employment status, the obligation to account to HMRC and the risk of non-compliance with IR35 will transfer from the contractor to the engaging client. As such, the final decision as to whether a contractor is inside or outside IR35 (and therefore the risk) will fall to the engager, who is likely to prefer taking a cautious approach to interpreting the rules.
2. What do the new IR35 rules mean?
In essence, the rules prescribe that the engager must deduct PAYE and NI (including employer contributions) from a contractor’s fee to pay these over to HMRC before paying the balance to the contractor.
3. My engager has decided IR35 applies, what now?
As has been discussed elsewhere on this site at length, the choices available are broadly:
- Continue working for the engager, with the above deductions being made;
- Continue working for the engager using an umbrella company
- Take employment with the engager as a full-time worker
- Cease working for the employer and seek alternative engagement outside IR35;
Each of the above options has its drawbacks, either through a reduction in take-home pay, autonomy and flexibility, or indeed a reduction in the availability of suitable opportunities. Additionally, HMRC has indicated that the ‘intermediary’ model may be subject to challenge. In the current climate where HMRC is taking substantial steps to recover monies under models which were previously sold to contractors as being tax compliant, it would appear a risky course to take. While there may be scope for requesting a review from an engager as to whether IR35 really does apply, as detailed above, this would be at their risk so there is likely to be resistance.
4. I have decided to take permanent employment or engage through an umbrella, what should I do with my PSC?
Following the decision to cease to trade using a contractor’s PSC, they will effectively be left with a shell company, which will hopefully have a positive balance sheet comprising of cash (and most likely few other) assets, once it has paid over its final trading liabilities (including any corporation tax). If there is a negative balance sheet, the director of the PSC should contact an insolvency practitioner for advice as soon as they become aware of the position.
Presuming, however, that the balance sheet is in a positive position, the contractor effectively has two options:
- Take steps to close the company; or
- Leave the company dormant.
5. Should I close my company or leave it dormant?
The answer to this question will be dependent on a number of variables, the principle of which is the contractor’s intentions going forward. In my previous articles for ContractorUK, I have discussed the availability (or otherwise) of Entrepreneurs’ Relief, which is a preferential (10%) tax rate available on capital distributions in certain circumstances.
One of the prohibitions on claiming Entrepreneurs’ Relief is if the contractor (or a person connected to them) carries on a similar trade through a company or partnership within two years of receiving a capital distribution. As such, while this is not conclusive as to whether closure will be appropriate or not, a contractor considering closure would need to be aware that distributions may be taxable at the standard rate for capital gains (ordinarily 20%).
In addition to the above consideration, it should be noted that Entrepreneurs’ Relief is only available if assets are distributed within three years of the cessation of trade by a company. As such, while an immediate decision is not required, a contractor needs to be mindful that the ability to claim the Entrepreneurs’ Relief rate would be lost if the company was to be left dormant for an extended period.
If a Members’ Voluntary Liquidation is necessary (ordinarily because the remaining assets on closure exceed £25,000), assets can only be distributed once the liquidator has been appointed. As such, contractors should ensure advice is taken early in order that the liquidator has the ability to make the distribution within time.
6. What else is there to consider?
Clearly the contractor may wish to consider keeping their PSC, in order to retain the flexibility of being able to re-enter the contractor market without the need no set up another vehicle. This may be of particular importance in the event that a PSC has certain accreditations which would need to be started from scratch with a new company, although the actual costs of setting up a new limited company are low.
If a dormant company is retained, the director’s duties will continue, so they will need to ensure that they maintain supervision of its affairs. While typically the duty to file annual returns and keep accounting records up to date will be carried out by an accountant, they remain the director’s ultimate responsibility, and clearly there will be a cost implication to this. There is of course a cost implication to conducting a closure process, so the contractor may wish to consider which is likely to cost more in the long run, again having regard to the likelihood of the PSC needing to be used in future.
Lastly, it is worth noting that while I am not aware of any immediate likelihood of Entrepreneurs’ Relief being withdrawn, it is fair to say that in the current political climate, it is far from certain that this relief will remain available indefinitely. As such, it may be worth seriously considering the closure option, while the relief is still in place.
As is so often the case, the key is for contractors to take professional advice as regards their options. Accountants can typically provide an illustration of the likely tax and other costs of differing scenarios, whether this is with an eye on closure, or continuing in the market in one way or another (or indeed a bit of both!).