What to do if you are closing your personal service company due to IR35
If you have been deemed to be inside IR35, you need to take steps to ensure that you firstly remain compliant and within the law, and secondly take the path that will be most beneficial for you if you are considering closing your limited company.
This is important because, for instance, if you simply wind your company up, you will pay tax on any residual assets at 40%, but if you qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), you will only pay 10%, says Cheryl Brown at Beacon Lip.
What are your options?
You could apply to Companies House for a voluntary company strike-off, but this may not be granted if the business has creditor agreements in place or has recently traded.
Members’ Voluntary Liquidation (MVL) may be the more appropriate course of action.
MVL may be utilised to close a solvent company, which has simply come to the end of its natural life. The reasons for this could be IR35, such as if clients' risk-averse reactions to the revised legislation have left your company consistently not engaged. But it could also include the fact that you are retiring or re-entering employment.
MVL allows shareholders to be granted their investment in an advantageous manner. However, Capital Gains Tax must be paid on the money that they have made on their original investment. And if the company’s assets are more than £25,000, the distribution of capital may only be undertaken by the liquidator.
The advantage that we noted above is that this capital distribution could qualify for Business Asset Disposal Relief (BADR), which has a lifetime allowance of £1,000,000. To qualify for BADR, the company must be a personal trading company with you either an employee or a director. That is to say, you must own more than 5% of the ordinary shares and 5% voting rights. You must also be entitled to at least 5% of either the profits that are available for distribution and assets on the winding up of the company or the disposal proceeds if the company is sold. The liquidation of the company must commence within three years of the cessation of trading.
How do you close a company?
You must apply to Companies House using form DS01. Any co-directors will also need to sign the form. All stakeholders will need to know about the plan: these include shareholders, creditors, your insurance company and your bank. The contractor should have no outstanding debts to HMRC: these could include VAT, NICs, PAYE and corporation tax.
HMRC should be sent all paperwork, including a set of accounts for the period from the contractor’s last filing to the final day of trading. VAT registration should be cancelled. And a final tax return should be completed.
It should be noted that an application to strike a company off the register cannot be made if at any time in the last three months, it has traded or otherwise carried on business; changed its name, engaged in any other activity except that which is necessary for making an application to strike off, concluded the affairs of the company, complied with any statutory requirement, made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business.
What about the final dividend?
Before liquidation begins, it is imperative to take any retained profits as a final dividend. Exactly how this is accomplished will depend on the amount of profit and your chosen exit strategy. MVL remains the most tax-efficient vehicle, once BADR is factored in.
If the company’s profit is more than £25,000, distributions will be viewed as income and attract income tax. The income is usually taken as the final dividend, instead of as salary. If it is less than £25,000, shareholders will pay Capital Gains Tax. But, if BADR is allowed, then the contractor would only pay 10% tax, regardless of their rate of personal tax.
Business Asset Disposal Relief can be claimed through your tax return or by completing section A of the Business Asset Disposal Relief helpsheet. The deadline to make a claim is January 31st of the year following the tax year in which you sold or closed your business.
Closing your company – particularly in light of IR35 – is a delicate and complex matter, with a number of different options and paths you can take. As always, it is prudent to seek professional advice from a licensed practitioner to be absolutely sure that you are pursuing the most tax-efficient strategy while remaining compliant with the rules.
At Beacon Lip we are fully licensed and qualified to assist in the winding up of a company and we do not charge for an initial meeting. Find out more here.