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Whilst the nation has been gripped by the UK’s exit from Europe over the last three years, another topic which has been hotly debated up and down the country by those in the contracting sector is the impact of the new off-payroll legislation, its impact on the public sector to date and the ramifications when it is rolled-out to the private sector in April 2020. We know that when the reforms hit the public sector in 2017 many public service hirers put all contractors inside IR35 to avoid any comeback. Come April 2020 the same could happen.
Faced with being deemed an employee and unable to continue working through their own personal service companies (PSCs), many contractors will be prompted to consider their options. Some could choose to work through a different model, such as an umbrella, but many contractors may decide to close down their limited company and pursue alternative paths.
John Bell is a chartered accountant and insolvency practitioner who founded Clarke Bell in 1994. Here, he shares his advice with FCSA members who will be facing talks with contractors in the coming months about closing down their PSCs.
A contractor closing down a business can apply for voluntary company strike off at Companies House but a Members’ Voluntary Liquidation (MVL) may be more appropriate. A strike off request could be turned down if a business has creditor agreements in place, has traded over the last three months or has changed names over the last three months.
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 Off-Payroll reforms will undoubtedly prompt such a process but retirement or entering full-time employment could also be valid reasons to close a personal service company. The process of an MVL facilitates a controlled exit enabling shareholders to realise any investment in a tax-efficient and advantageous way, as any money distributed to shareholders represents a return of capital, on which capital gains tax is payable by the shareholder. Where the assets of a company are more than £25,000, any capital distribution can only be carried out by a liquidator. And, any distributions found by a liquidator are taxed as capital distribution, which is a tax on the capital gain, the gain in the value of the shares compared with the amount which the shareholder paid for them. The advantage for contractors is that money received as a capital distribution may qualify for Entrepreneurs’ Relief. However, the shareholder must own at least 5% of the shares for at least one year prior to liquidation and any assets must be distributed within three years.
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 forwarded 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 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.
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 Entrepreneurs’ Relief has been taken into account.
If the profit held in the company is under £25,000, shareholders pay Capital Gains Tax. However, if a contractor is eligible to apply for Entrepreneurs’ Relief, he or she would pay a tax rate of 10% regardless of the rate of personal tax paid.
If the profit held is above £25,000, the distributions will be deemed as income and subject to Income Tax and the income is typically taken out as a final dividend not as salary.
Private sector IR35 reform is looming and plans should be put in place now to navigate the solvent liquidation path smoothly and painlessly. My advice to FCSA accountants is to start the MVL conversation with your contracting clients and help to take the pain out of a process that doesn’t need to be daunting.
John Bell is a chartered accountant and insolvency practitioner. He founded Clarke Bell in 1994 and, to date, the company has conducted over 1,800 MVLs.