Published: 31st March 2021
IR35 reforms within the private sector, which are due to come into force on 6 April 2021, will transform the way contractors and other off-payroll workers operate and pay tax. The changes will not only affect contractors, but also the companies (or end clients) that engage their services as the onus will now be on them to ensure contractors fall outside IR35 legislation and are therefore rightly classed as a true contractor rather than a ‘deemed employee’.
For some contractors, these changes will make their current operating model unviable. As end clients worried about being held accountable for incorrect IR35 decisions distance themselves from engaging contractors going forwards, the future of contracting within the private sector is far from clear.
This will leave some contractors – such as those who are moving away from operating as a contractor and switching to an employed position – with Personal Service Companies (PSCs) which are no longer required.
Closing down an unwanted PSC can be achieved in several ways; either through dissolving the company at Companies House, or else entering into a formal liquidation process to bring the company to an orderly end. When it comes to liquidating a PSC, there are two routes available, either a Members’ Voluntary Liquidation (MVL) or a Creditors’ Voluntary Liquidation (CVL). The route taken will depend on whether the company is solvent or insolvent at the time of closure.
MVLs allow a solvent company to be closed and profits extracted in a cost-effective and tax-efficient manner. Directors can also take advantage of Business Asset Disposal Relief – formerly known as Entrepreneurs’ Relief – which could lower the rate of tax paid even further.
What happens, however, if the Personal Service Company in question is in an insolvent position?
The past 12 months have posed challenges for companies, contractors, and employed individuals across the country, with virtually no industry immune to the effects of the Covid-19 pandemic. For many contractors this has led to reduced trade or in some cases no work coming in at all as contracts are put on hold by companies keen to see how the situation pans out before committing to future projects.
Those who have continued to secure contracts may be experiencing late payments from once reliable clients who themselves are struggling during these uncertain times. Just a couple of instances of late payments can quickly put a huge strain on cash flow, leaving the PSC in a financially precarious position.
While government initiatives such as the Coronavirus Job Retention Scheme (CJRS) which allowed employees to be furloughed, along with the Self-Employed Income Support Scheme (SEISS) have been a lifeline to many, in the main, these have not been as useful to contractors. Those operating within a limited company structure do not qualify for SEISS, while the CJRS is also not appropriate for those who typically take their income from the company through dividends.
As an alternative, many contractors will have been tempted to take out a government-backed loan either through the CBILS or Bounce Back Loan Scheme in order to help support themselves during the pandemic. These loans were first made available in March 2020, and it is reasonable that, at that point, nobody could have foreseen that we would still be under national lockdown restrictions over a year later. So, while these loans may well have been taken out in good faith, the reality is the prolonged restrictions on trade mean many will now not be in a position to begin making repayments towards this loan due to continued diminished trade.
A combination of these factors means that many contractors who would have been in a solvent position 6-12 months ago have found themselves with no money coming in and relying on the funds within the company to meet their daily living costs, pushing them to a state of insolvency.
If your PSC is insolvent, you should seek help and advice from a licensed insolvency practitioner. There are a range of business rescue and recovery options which can be put in place to help turnaround the fortunes of the company; however, if the changes to IR35 mean you no longer require your company, you may wish to consider placing the company into a liquidation by way of a CVL.
A CVL is a formal process which brings about the end of an insolvent company. The appointed insolvency practitioner will handle the whole process on the company’s behalf including liaising with any outstanding creditors. Any debt which remains at the end of the liquidation will be written off unless this has been secured with a personal guarantee.
If you are a contractor and are considering the future for your PSC in light of the IR35 reforms, speak to the experts at Begbies Traynor where our team of licensed insolvency practitioners will be able to talk you through your options.