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 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 apply for 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, but 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 entrepreneur’s relief, but only if the shareholder owns at least 5% of the shares, if that holding lasted for at least twelve months before liquidation, and if the assets are distributed within three years.

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.

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 entrepreneur’s relief 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 entrepreneur’s relief is allowed, then the contractor would only pay 10% tax, whatever their rate of personal tax.

Final thoughts

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, whilst of course remaining compliant.

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.

Wednesday 15th Jun 2022
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Written by Beacon Lip

Beacon Lip deliver tailored solutions to company directors, business owners and individuals experiencing financial hardship. They also offer assistance to professional advisors, such as accountants and solicitors, to ensure that their clients are given the most appropriate advice for their situation. https://www.beaconllp.com/

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