Dormancy, the ideal halfway house to shelter contractors from the IR35 reform storm?
As IR35 reform in the private sector creeps closer, contractors might be wise to consider holding back and waiting on the side-lines to witness the reform’s ripple effect, so trends in end-users’ risk appetite can be sussed out, before you have to commit to your next move.
Following the April 2017 introduction of IR35 reform in the public sector (which continues to leave prints in the mud), HMRC’s continued attack-plan leads us into April 2020 when PSCs may be forced to renegotiate daily rates or switch operating structures if decided inside IR35, writes Jon Munnery of UK Liquidators.
Ahead of the Christmas election, major political parties continue in their attempts to win support from the contractor sector by pledging to review the changes. But businesses are being advised to continue preparations despite the proclamations, chiefly from the Conservatives, the Lib Dems and Labour. The direction that the measure will take under the leadership of a Conservative or alternative government will be known shortly after the election on December 12, but not before.
As some contractors even ponder taking to the bench to rethink their work strategy ahead of April 2020, if you are considering going further -- parting ways with your limited company for a short period, the option of dormancy may be worth contemplating.
Juggling inside and outside IR35 contracts post-April 2020
If post-April 2020, it’s more lucrative for you to operate through an umbrella company, registering your business as dormant means hitting ‘pause’ on your PSC and cutting major ongoing maintenance costs.
Fortunately, it’s just as easy to hit ‘play’ and continue trading as it is to have a hiatus from trading. So despite being serious-sounding, dormancy really could be an ideal half-way house if you’re looking to slowly test the waters following the 2020 reform, especially if you know that, initially, a PSC isn’t going to cut it for you, given the contract you’ll likely have come April 6th 2020.
What contractors must do if dormant
If you do decide to take the dormancy route, you must inform HMRC of your decision to mark your limited company as dormant within 30 days of doing so.
If you are looking to switch operating structures for a brief time, you may consider registering your limited company as dormant to temporarily cease trading. In order for a business to be classed as dormant, there should be no ‘significant transactions’ put through the business, including receiving income, interest payments, renting properties and employing staff.
A ‘significant transaction’ is one that is required to be submitted in your accounting records, excluding filing fees to Companies House and penalties, such as for late filing. As no significant transactions can pass through the business, you should cancel all standing orders and direct debits to and from your company account.
If you have no plans to restart trading within the year, you should close your PAYE scheme (which is responsible for deducting National Insurance Contributions and Income Tax for limited company employees).
Be aware that while your limited company is dormant, it remains in existence which means that if you intend to restart the business, you can pick up where you left off, rather than beginning the process again, allowing you to retain your existing limited company name.
What paperwork should I submit during dormancy?
During the period when your limited company is registered as dormant, you will not be subject to corporation tax and you will be exempt from filing company tax returns.
As a small business, you must also deregister from VAT within 30 days of registering your business as dormant. A small business should meet two of the following points to be classed as ‘small’:
- Your annual turnover must not exceed £10.2 million
- Your balance sheet total must not exceed £5.1 million
- The average number of employees must not exceed 50
The above criteria will, of course, already be familiar to IR35 reform- regulars, as it’s the basis for the small company exemption contained in the draft IR35 legislation. But as a dormant limited company, you will still be required to file your annual accounts and confirmation statement. If you plan to restart trading, you should continue sending VAT returns marked ‘nil.’
How can I restart my limited company after accepting a private sector contract outside IR35?
As the ripple effect of the IR35 public sector reform continues, HMRC is leading a witch-hunt for those it suspects to be operating as disguised employees. Many contractors have already reported that big businesses are forcing them to quit or join the payroll ahead of the April 2020 reform, as seen most recently with Vodafone. Not extending contracts beyond April 2020 is almost ‘de rigueur’ at mid-sized and large financial companies, or so it seems. Beyond financial services however, it seems a big chunk of end-users are still making up their minds.
As to Vodafone and the like, the thinking of these business appears to be to reduce the likelihood of an IR35 investigation, take a risk-averse approach to off-payroll workers, and give as little chance to the Revenue’s IR35 inspectors as possible, by ceasing PSC engagements all together.
Alternatively, engagers can keep their PSCs and post-April 6th, those of them who are medium-sized and large companies will be required to determine the IR35 status of their contractors in a Status Determination Statement. If an incorrect IR35 decision is made, the decision-maker will bear the risk.
Contractor working options amid the uncertainty
Due to the complex nature of Intermediaries’ legislation(– that in itself is no doubt behind the risk-adverse approach many clients are taking), and given HMRC’s repeated misunderstanding of the rule, contractors might have had enough. So PSCs may consider becoming a fully-fledged PAYE employee, by joining the end-user payroll or an umbrella company. Some may do this just to bide their time during any potential backlash immediately after April 6th. Again, dormancy could come into its own here.
Remember though, the heart of IR35 remains indifferent; the onus will soon fall on the end-client to determine the IR35 status of PSCs that the end-user engages. This will increase the risk of misjudgement around status and therefore, increase non-compliance, much to the detriment of the contractors in question.
After taking steps to mitigate these risks, if you decide to revisit your limited company to take on a contract outside IR35, here are the minimum steps you need to take with your dormant PSC:
- Register for Corporation Tax: Your corporation tax accounting period will commence once trading activity has restarted. You must pay corporation tax within 9 months and 1 day of your company year-end.
- Submit Company Tax Return: This must be submitted within 12 months of your company year-end.
Accounting costs associated with dormant accounts
There are no major ongoing maintenance tasks for a dormant company.
But your accountant will require a small fee to prepare and submit your company accounts and confirmation statement. This fee will vary depending on your accountant and range between £40 to £250 plus VAT. In some cases, you may be able to negotiate a discretionary rate as the financial paperwork required for a dormant business is significantly less in comparison to an actively trading limited company.
Long-term solution for business closure following IR35 reform
If you’re operating through an umbrella for a short-term private sector contract, which was deemed by the end-user as caught by IR35, you may consider keeping your limited company ticking along and return to it at your contract end-date.
Yet if you wish to permanently depart ways with your limited company, you may consider a Members’ Voluntary Liquidation (MVL) as an efficient exit tool. If your company is profitable, however, you wish to draw a line and close the limited company as a result of the reform, an MVL is a formal closure process for solvent businesses, helping you maximise retained funds. You may also be entitled to receive Entrepreneurs’ Relief, further reducing your tax liability. Advice tailored to you and your business is a must in our opinion with both MVL and ER, although usually experts in the former can advise competently on the latter.
As the contractor community awaits the upcoming IR35 storm from showery April, and as promises of shelter rain down, the result of the election may indeed offer respite to the changes. But to us, the chances of that respite going beyond the superficial look extremely narrow. It’s not the first time politicians have paid contractors lip service in a bid to win votes during an election campaign. So plan now by exploring flexible working options which allow you to switch between operating structures – by all means. Do consider though, dormancy may be the temporary pause button you’re looking for to apply to your PSC, placing it on the backburner until we can all get a good lie of the land.