With IR35 reform still at a green light, some contractors will park, pass or stop their PSCs
If you’re on the fence about keeping your limited company in full operation as we hit the six-month countdown until contractors supplying the private sector will be forced to stand tall against the IR35 off-payroll reforms, keeping your business in limbo to minimise overheads may be the best compromise, writes Jonathan Munnery of UK Liquidators, a Members’ Voluntary Liquidation specialist for IR35-concerned contractors.
Pave your PSC's path (now-ish)
Ideally, before April 2021 takes its course and factoring-in the new trading climate which will invariably be coloured by both Brexit and Covid-19, contractors will need to pave the path for the future of their limited company. And if you like options, you can decide between swinging your company’s doors back open or laying your business in the sand after extracting retained profits and switching to an alternative operating structure.
The unescapable reality is that, barring an 11th hour change of heart by a government still on the back foot about coronavirus, the IR35 reforms which were put on the shelf after the pandemic hit are creeping back to the frontline. The result? Medium and large private sector companies of the more risk-averse kind are returning to terminate contracts, putting the dampeners on future trade for PSC contractors. So if you’re one of those contractors who are effectively being repositioned in the pecking order by commercial end-hirers, on which the onus lies to determine employment status from April 6th 2021, your next move may well be to forecast financial returns through a brolly and to simply to shut up your ‘Ltd’ shop.
Pressing the pause button: How to park your PSC
As you wait to see the real contenders emerge from the IR35 changes, and assess future options, switching your limited company into dormancy mode can freeze daily operations, slice out any operational maintenance costs and fraction your probably not insignificant accountancy costs. Taking the dormancy route can also help you straddle your feet between different operational structures, giving you the option to easily resume operations via your PSC if that’s where maximum take-home pay lies -- later down the road. When it comes to the director responsibilities of a dormant company, here are your obligations:
- Filing company accounts to Companies House
- Employing an accountant to prepare and submit the above (if you wish)
As a dormant company, you are not legally allowed to run any accounting transactions through your business, so if you’re looking for a route which allows you to run your business on the backburner, this option is your contender.
Stopping your 'Ltd' altogether: Grinding your business to a halt
If you’re interested in making a graceful exit and extracting the fruits of your labour through a solvent liquidation and distributing returns cost-efficiently (and tax-efficiently), read on. A Members’ Voluntary Liquidation may be your end goal after witnessing the real-life consequences of HMRC’s flawed CEST tool, blanket decisions ejecting you from the running for contracts and other unpalatable effects of the IR35 reforms.
So a contractor liquidation would be administered by a licensed insolvency practitioner if you’re caught by the reform and pushed to exit. The tool of liquidation is suited to profitable contractor businesses with retained profits over £25,000 and the ability to settle outstanding liabilities within 12 months. If you’re eligible to receive Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) before April 2020, this can further reduce your tax liability.
Passing on the baton: Selling your limited company
The selling on your PSC route will appeal to a small fraction of contractor limited company owners, who can point to high turnover, a commendable reputation, a proven track record and well-established relationships which have been instrumental to their commercial success.
But the value of your business is more than just the bank balance – it’s defined by finer details holding appeal to prospective buyers. Profitability, asset, and strong financial forecasting will contribute to the overall value, all of which can be advised on by a reputable business transfer agent or broker. Cue Paul Williamson, an expert at Selling My Business, and in particular, a few words from him to give a sense for contractors of the impact that the coronavirus pandemic is exerting on the appetite of prospective buyers and sellers.
“The trading tables have been cleared for serious buyers with cash capital retained over the years, pre-Brexit,” he says. “As proceedable buyers overtake the market, this is prime time for sellers to attract genuine, headstrong buyers, intent on scoring their next business venture.”
Despite the nature of the bumpy economy mirroring the volatility of the pandemic, private sector IR35 reform continues to have the ‘green light’ from ministers, almost regardless of concerns still swarming around HMRC’s interpretation of the April 2021 framework. That puts the onus on contractors to decide if they want to show an ‘amber light’ to their PSC (and pause it), or a red light (and stop it).
The fact that chancellor Rishi Sunak has only just sat down from a whole series of announcements, which started with him putting the Autumn Budget on the backburner, strongly indicates that the chances of a reform rethink are slim. Whether the backburner (or just the burner) now beckons for your PSC is a consideration best explored with tailored, professional advice, particularly if you want to prioritise tax-efficiency and your bottom line.