Published: 18th August 2021
Changes to IR35 legislation that were brought in by the government in April 2020 have created significant problems for contractors operating as limited companies. The impact is such that some contractors cannot trade due to IR35 changes, and are considering closing down their businesses.
So if you believe you need to close your company because of IR35 legislative changes, where can you find reliable support, and could there be any alternatives to closure?
Begbies Traynor Group are IR35 specialists and understand the negative impact the new rules are having. We can offer trustworthy guidance on the best course of action for your individual circumstances.
HMRC are attempting to prevent disguised employment, which can lead to tax losses. Disguised employment occurs when a contractor carries out the same duties and works in the same way as employees of their client, but is not paying the same amount of tax.
The limited company structure enables contractor directors to take remuneration through dividends, alongside a minimal wage. This ultimately results in a lower tax liability compared with employees, who pay income tax on their full salary.
IR35 changes mean that private sector end-clients are responsible for determining a contractor’s employment status. This brings IR35 off-payroll regulations in line with public sector clients.
If, after looking at the nature of your working relationships with your clients, you feel you are at risk of investigation by HMRC, you may decide that closing down your company is the only option.
If your status is determined as being ‘inside IR35’ due to the working practices and parity with a client’s employees, you face an increased tax liability because you will need to pay income tax on your earnings.
This might result in being unable to trade profitably due to the IR35 amendments. This is clearly an unsustainable situation, and you may believe that closure is your only course of action.
Tax efficiency if your company is solvent
If your company is operating with retained profits of £25,000 or more, but you do not see a future for the business, a formal process known as Members’ Voluntary Liquidation (MVL) is likely to be the most appropriate method of closure.
It enables you to claim Asset Disposal Relief, which was formerly known as Entrepreneurs’ Relief. If you are eligible for Asset Disposal Relief, you pay an effective rate of tax of 10% on distributions from the company, so it is an extremely tax-efficient way to close down.
The alternative method if your business is solvent, is voluntary dissolution. As with MVL, this ultimately results in the company’s name being removed from the register at Companies House.
How do you proceed if your business has encountered serious financial problems, however, and needs to be closed down to protect your creditors?
If your company is insolvent
If your company has entered insolvency due to IR35, you need to follow a procedure called Creditor’s Voluntary Liquidation (CVL). Essentially, this involves repaying creditors as high a return as possible from the sale of company assets, with remaining debts being written off.
If you have worked under a contract of employment, and you are an employee of the company as well as a director, you may also be entitled to claim director redundancy by taking this route.
The average claim for director redundancy is currently £9,000, and we can provide further information on your entitlement and how to claim.
Your legal duties when closing down an insolvent company
Your legal obligations are paramount when considering closing down an insolvent company. You must follow the rules laid down in insolvency law and prioritise creditor interests over your own, or those of your company.
Failing to do so could lead to personal liability for additional financial losses suffered by your creditors, and potentially, disqualification as a director for up to 15 years. Your legal obligations change as soon as your company enters insolvency, and it is vital to obtain licensed insolvency support at an early stage to navigate successfully through this process.
Begbies Traynor Group can provide the professional support you need in the face of changes to IR35 legislation. We will present your best options, and explain any potential ramifications where appropriate.
Please get in touch with our partner-led team to arrange a free, same-day consultation. We operate an extensive network of offices nationwide, so you are never far away from professional assistance.