Contractors, be aware that company strike off actions have restarted
Despite lockdown 3.0 remaining very much in place for the time being, it appears that the ‘show must go on’ for Companies House and its registered users, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.
Striking off restarted on Monday
In the latest of a series of announcements, Companies House has said it is now resuming strike offs (as of March 8th 2021), having previously paused both compulsory and voluntary strike off processes in January due to coronavirus impacts.
What is striking off, and what does Companies House’s resumption mean?
As my previous ContractorUK article outlined, striking off is the process by which a company is dissolved without firstly being in liquidation.
Contractors should note that the present Companies House announcement refers to both voluntary strike off and “and those we believe are no longer carrying on business or in operation.” This is a polite way of saying that compulsory strike off actions will resume in relation to those companies which are delinquent in their filing affairs.
As such, any contractors whose companies have overdue accounts, confirmation statements or other filing matters would be well-served bringing them up-to-date to avoid compulsory strike off action being taken by the Registrar of Companies, which can result in companies being dissolved.
The consequences of a company being compulsorily struck off were covered in my earlier article so almost needless to say, they can be very expensive indeed!
What impact does Budget 2021 have on closing a company?
It cannot have escaped the notice of contractors that there were a myriad of headlines over the past few months regarding potential tax rises, particularly in the sphere of Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR), still commonly referred to as its previous name Entrepreneurs’ Relief.
CGT is the tax paid on shareholder distributions made by a liquidator, and I have previously written about the possibility of a ‘double-whammy’ raid on contractors if a CGT rate rise, combined with a potential upturn in solvent liquidation (MVL) closures is driven by IR35.
The good news on this front is that despite all the speculation, there was no change in current rates of CGT or BADR criteria. There was also no reduction in the annual exemption rates for individuals. The bad news of Budget 2021 is that there was no delay in the implementation of IR35.
The crux of the above, is that for those individuals who are leaving contracting and have retained reserves of over £25,000, they can still benefit from a rate of 10% (if BADR applies) or 20% (ordinary CGT rate) once the annual exempt amount (£12,300 at present), has been utilised.
Is there a sting in the tail?
The answer to this is probably ‘yes’ given that the chancellor has made it clear that taxes will need to be raised to repay the public spending which has been incurred in the Covid-19 pandemic. Specifically in relation to CGT, a review is being conducted by the government and many consider its exclusion from Budget 2021 to be a stay of execution (perhaps following significant political pressure), rather than a long-term policy.
While future fiscal decisions will no doubt be made based on prevailing coronavirus infection rates and restrictions, it is worth noting that a further Budget is due in the Autumn, in addition to ‘tax day’ of March 23rd. As such, any contractors who find themselves with a dormant company once IR35 reform (the April 6th 2021 off-payroll rules) is implemented, should consider their options swiftly. Closure processes should be considered carefully, and cannot be carried out overnight. If in doubt, speak to your accountant or a qualified Insolvency Practitioner (even if your company is solvent!)
Was there anything else in Budget 2021 affecting insolvency?
No not really. As has been advised however since the March 3rd announcements by HM Treasury, contractors will need to pay close attention to the new rates of corporation tax since the lower-rate bands can be utilised more quickly than some may appreciate.
But there was little else of consequence for limited company contractors other than the much-expected announcement of the extension of the Coronavirus Job Retention Scheme.
Potentially helpfully for some directors, the Red Book announces various new grants, an extension to the business rates holiday and a “fifth and final” Self-Employed Income Support Scheme grant. As welcomes as they may be for the economy overall, these measures are not likely to have a significant impact on contractors.
Elsewhere at Budget 2021, the reduced VAT rate in the hospitality sector has been extended, so contractors need to be sure to get their expense claims right. That said, the number of hospitality expense receipts being submitted is likely to be sparse until late April or early May, when eateries and the like are due to reopen from the ongoing lockdown.
At the time of writing, there has also been no extension to the Deferment of Corporate Insolvency and Governance Act (CIGA) measures with the temporary restriction on winding-up petitions still due to end on March 31st 2021.
Recovery Loan Scheme (RLS)
But Budget 2021 did announce the new ‘RLS,’ which is designed to provide support in place of the outgoing Coronavirus Business Interruption Loan (CBIL) and Bounce Back Loan (BBL) schemes.
Again, while this will be welcomed by some businesses and many contractors have utilised the BBL previously, the new Recovery Loan Scheme may not have a significant impact in the contractor sector. Further detail is to be announced but it has been confirmed that recipients of CBIL/BBL funds can apply, and as with BBLs there will be no personal guarantees required (for facilities under £250,000).
RLS facilities are subject to credit checks and a viability review, however This, combined with a minimum loan facility of £25,001 (lower limits are available for asset finance agreements) suggests that the scheme is aiming to support SME companies rather than contractor companies, who may struggle to evidence viability if there is no ongoing contract in place.
In any event, the maximum term of an RLS loan is six years and interest is payable from the outset. While BBLs clearly did not start with the present 10-year repayment term at the outset, given government spending to date, it would be prudent to assume that in this instance, the maximum term will remain.
Quite apart from the above, given how difficult trade has been in certain sectors recently, the appetite (and wisdom) for contractors to borrow more money in the present climate is questionable, unless there is secure work on the horizon.
Any further financial considerations?
There has been a huge uptake of BBLs in all sectors, including the technology and contractor marketplaces. Unfortunately, for some, contracts have been hard to come by and it may now be some time since fee-paying work was carried out by some PSCs.
If this is you and your business, you should speak to your accountant to make sure that any amounts being withdrawn from the company are being recorded and documented appropriately. It has historically been common (and tax-efficient) for contractors to be paid a low salary and for the balance of their remuneration to be paid as dividends.
The above, however, relies on there being ‘distributable profits’ being available for the payments made over the PAYE salary to be declared as dividends. In many cases, directors draw a fixed monthly sum for a 12-month period and then an annual dividend is declared to cover payments made.
Dividends watch (cont.)
If, however, at the end of the 12-month period (or indeed earlier if there is an enforced cessation before that) it is concluded that there were insufficient distributable reserves to cover the sums drawn, this could give rise to an overdrawn loan balance which is repayable to the company. For the avoidance of doubt, any distributions found to have been declared in excess of distributable profits must be repaid.
If any contractors have concerns regarding the solvency of their company or dividends drawn, they should speak to their accountant and/or a licensed insolvency practitioner regarding their options.
So all in all, despite the chancellor’s Budget 2021 seeming to lack the theatre of previous Budgets – potentially hard to get around with a House of Commons deserted due to covid restrictions, just as it does for Companies House users, the compliance ‘show must go on’ too.