Contractors, is keeping your limited company sensible or is it time to dissolve it?
The IR35 off-payroll working reforms have now been in effect for nearly two months, but contractors are still having to adjust and consider their options for how they will deliver their services to clients in the future.
In fact, as a limited company contractor, you may have had to adapt to the way you work as the uncertainty over the past year has resulted in less contracting roles being available coinciding with potentially more taxing ways of working, write Carla Roberts, director of legal services, and Leila Ghazzali, trainee solicitor, of WTT Legal.
Three working alternatives if your PSC's plus points fade
Such changes may also mean that having a limited company is no longer necessary and rather than operating via a PSC, you may now be considering the idea of either working through an umbrella company, moving to PAYE as the end-client’s permanent employee, or perhaps via the agency’s payroll.
Many contractors who have previously operated via a Personal Service Company (PSC) appreciate its clear advantages, including;
- having more control over your working life,
- having more flexibility when/how you work,
- the ability to use a more tax efficient structure by taking salary and dividends, and
- having access to claim a number of expenses as long as they are “wholly and exclusively” for the purposes of the trade of the company.
IR35 isn't the only push factor
However, there has been a shift in the way contractors and end-clients operate as the end-client may no longer take on contractors operating through a PSC ('blanket banning') or instead have considered your engagement to be inside IR35, as they attempt to mitigate their risk of being caught by the off-payroll reforms.
But the new IR35 may not be the only reason -- perhaps you no longer wish to deal with the stress of running your own business.
Whatever the reason behind the switch there are plenty of factors which should be considered to ensure you are working in a way that is suitable and also efficient.
Risk, responsibility, requirements
Running your own limited company requires an exceptional amount of compliance and on balance, it may be too risky to retain your company. In fact, IR35 may still be a concern for your limited company, and although the off-payroll reforms shift the responsibility of assessing and collecting the correct tax from the contractor to the end-client, there are still circumstances in which the contractor retains the responsibility for assessing their own status.
These circumstances will occur where the end-client is considered to be wholly overseas or ‘small’. Remember, a company will be considered ‘small’ if it meets two of the following requirements; a turnover of £10.2 million or less, £5.1 million or less on its balance sheet, and/or 50 employees or less.
This therefore adds more risk to running your limited company, as HMRC does not seem to be slowing down their investigations as they continue to take on IR35 cases. For example, the Gary Lineker matter is the most recent high profile IR35 case that HMRC is currently investigating, in which he faces a huge tax liability of £4.9 million (although this figure is the subject of debate).
Taxing, costly times
In addition, contracting through your own limited company does mean a certain level of administration is required, including filing your monthly returns, annual accounts with Companies House, and accounting for corporation tax and issuing invoices.
At Budget 2021 in March, it was confirmed that corporation tax will increase to 25% in 2023, with lower rates for small businesses. Companies with profits of £50,000 will be chargeable to the small profits rate of 19%. There will also be taper above £50,000 profits up to £250,000 of profits.
It you are no longer using your limited company, you do have the option of leaving your company dormant. There are still costs involved with maintaining a dormant company, however the costs are of course much lower and may even be less than the costs involved with formal liquidation. This may be a more suitable option for you, especially if you are expecting to use your limited company in the short to medium to term rather than go through the formal process of closing the company.
When you decide to shut...
Yet you may have come to the conclusion that closing your limited company is the preferable option (or you may still come to such a conclusion), meaning that you believe there is no longer any use for the company.
Well, if your company is solvent and can meet its financial obligations, you can close your company by way of a Members’ Voluntary Liquidation (MVL). An MVL is a formal process that winds up a company and allows the directors to realise the assets in the company. Please note, only solvent companies with assets typically over £25,000 will qualify for an MVL.
The main advantage of an MVL is the extraction of assets in a tax efficient manner. The extraction of the assets will be treated as capital rather than income and therefore subject to CGT rather than the higher income tax rate, depending on whether or not the relevant requirements are met.
BADR, anti-avoidance and striking off
In some instances, Business Asset Disposal Relief (BADR) will be available, serving to reduce the tax liability further at a CGT rate of 10%. Be aware though, each director can only benefit from this rate for £1million over his or her lifetime. To qualify for BADR the following criteria must apply for at least two years up to the date you sell the business:
- You must be an employee or officer of the company.
- You must have held 5% or more of the share capital of the company and 5% of voting share capital for at least 12 months; and
- You must have owned the business for at least 2 years
It is important to grasp that closing your limited company should not be a decision taken lightly. If you decide to wind up your limited company, and within two years you decide to carry on a similar trade, you could be caught by anti-avoidance provisions.
However contractors should not think an MVL is their only option if their limited company is no longer required. You can leave your company dormant, as mentioned, or you can apply to get your company struck off if it is solvent. The process is a much less formal process compared to an MVL and will cost considerably less, yet the maximum value of the company that may be distributed on a strike off is £25,000 and if any funds exceed this limit, it will be taxed as income. Therefore, in most instances, if your funds exceed £25,000 it may mean that an MVL is a more suitable option.
Finally, take stock and assess your options
Lastly, please bear in mind that your situation will be unique to you and therefore you should consider your circumstances and make a plan that is suitable to you, and you alone. No two contractors have identical sets-ups and particulars! We hope the guidance herein will support contractors in taking stock and assessing their options -- ideally with specialist help -- to arrive at an informed decision as to whether their company has had its time or will live on to trade another day.