Winding-up your limited company, now we know IR35 reform isn't going anywhere
With Budget 2021 putting paid to the idea of their further delay, the final countdown to the April 6th off-payroll rules is well and truly on, and the new IR35 legislation will see many contractors coming to a crossroads to face a number of options about their future.
Some might be able to find outside IR35 contracts and some might try inside IR35 contracting. A great deal of others will look to become an employee, such as working through an umbrella company, or exploring leaving contracting altogether to retire or pursue other interests. Quite a few of these avenues mean a limited company might no longer be required.
For the purposes of this article, let’s assume you fall into one of these latter camps, meaning your personal service company is potentially something you’re looking to dispose of, writes John Bell, the founder and director of licensed insolvency practitioners Clarke Bell.
What is the first step to take if I’m giving up contracting?
Reach out to your accountant and let him them know that you’re thinking of changing course.
Your accountant will probably encourage you to get in touch with a licensed Insolvency Practitioner, assuming your decision to depart from your limited company structure is sound, thought-through and well-reasoned. Most IPs offer a free initial call to discuss your options.
What is the most common route to close down a company?
For most contractors who are considering closing down a limited company, a Member’s Voluntary Liquidation (MVL) is the best option.
An MVL is a process used to wind up the affairs of a solvent company and typically used where a company has come to the end of its life. The new off-payroll rules from this April could prompt such a process but retirement or entering into full-time employment could also be valid reasons for closing a personal service company.
The alternative to an MVL is a voluntary company strike-off, but a strike-off request could be turned down by Companies House if a business has:
- creditor agreements in place,
- has traded over the last three months; or
- has changed names over the last three months.
So often, an MVL is more appropriate.
What is an MVL and why is it the best option to close?
An MVL is an HMRC-approved process, and a licensed IP must be appointed for the liquidation.
While it may have a negative-sounding ring to it - with terms like ‘liquidation’ and ‘insolvency practitioner’ - there is nothing negative about it. Quite the opposite, in fact. By placing a company into an MVL it is a clear illustration that someone has been running a successful company.
An MVL allows a contractor to draw any remaining profit as a dividend, paying income tax on the dividend amount. With the help of your licensed IP, who will liquidate a company, the reserves can then be distributed as capital, which are then subject to Capital Gains Tax (CGT) at either 18% or 28%.
Through an MVL, a contractor can also take advantage of Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before April 6th 2020).
If someone qualifies for this relief, this can mean that CGT will be paid at a rate of 10% on qualifying assets, which can translate into considerable tax savings. Each shareholder of the limited company could also benefit from a tax-free allowance of £12,300 -- the Annual Exempt Amount. If there are multiple shareholders, this can be highly-efficient.
What is the administrative process if I close my limited, and what form do I need?
It is important to apply to Companies House using a DS01 form which contractors will need to complete to start the process to close down a company. Any co-director, such as a spouse, will also need to sign the form.
Any shareholder, creditor, trader, insurance company and bank will need to know about the plan and be sure that a contractor has no outstanding payments due to HMRC, such as Corporation Tax, VAT, NICs and, if applicable, PAYE.
All paperwork should be sent to HMRC along with a final set of accounts from the date of a contractor’s last set of accounts to the final trading day.
Contractors must also inform HMRC to cancel any VAT registration, which could take up to three weeks to be confirmed, and must submit a final company tax return which covers the period from the last tax return to the final day of trading, taking account of VAT on stock and business assets.
Your accountant and insolvency practitioner will be able to guide you through the whole process.
What about contractor dividends when closing a company?
It is important to extract any retained profits as a final dividend before any liquidation process begins.
How a contractor takes this will depend on the exit route chosen and how much profit is left in the business. An MVL is the most tax-efficient method once the tax savings made from Business Asset Disposal Relief has been taken into account.
What about any profits?
If the profit held in the company is under £25,000, shareholders must pay Capital Gains Tax. However, if a contractor is eligible to apply for Business Asset Disposal Relief, he or she would pay a tax rate of 10% regardless of the rate of personal tax paid.
If the profit is above £25,000, the distributions will be deemed as income and subject to Income Tax so the income is typically taken out as a final dividend, not as salary.
Would I be better off waiting or acting now if I’m sure I want to wind-up?
Contractors who have decided to close their company now, because of IR35 reform or otherwise, would be advised to not delay
As mentioned at the outset, firstly, contact your accountant to discuss the best option.
If an MVL is the best option, the contactor (or their accountant) should contact a firm of IPs to discuss their MVL process and the costs involved. Our recommendation to contractors is to choose an IP who you feel comfortable with, and who has a lot of experience in MVLs and provides a service which is professional, friendly and at a good price. Knowing the contractor sector back to front helps too!
How long is there between deciding to wind-up and being liquidated?
Having chosen your IP, bear in mind that there are a lot of things which need to be completed to get the company into liquidation, and the funds distributed to the shareholders of the company, including:
- preparing final accounts, made up to the date the company ceased to trade
- paying any creditors
- disposing of any physical assets
- formal identity checks on directors
- completing a questionnaire about the company
- allowing the necessary statutory adverts to run their course
- dealing with the company’s bank to transfer the account to a specific client account set up by the liquidator
These tasks, and others, need to be completed for every MVL, so universally for contractors, it’s far from a same-day process.
Partly because of that, but also because we know now that the Budget has not delayed IR35 reform -- or tampered with BADR, my advice to contractors is to start the MVL conversation now, which should help to take the pain out of a process that doesn’t need to be daunting.
Editor's Note: This article is an updated version of the original, and includes the correct figure for the Annual Exempt Amount.