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Company Closure and Contractors

Company Closure and Contractors, Written by John A Waller, Director. Amended November 18th, 2022.

Contractors in the UK use an MVL (Members Voluntary Liquidation) as a tax-efficient solution to close their limited company, enabling shareholders to distribute and save taxes through “Business Asset Disposal Relief.”

Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, before April 6th 2020.

IR35 refers to anti-avoidance UK tax laws, which aim to tax “cloaked” employment at a rate comparable to work.

The UK government through HMRC support for contactors during the pandemic.

The benefits of an “MVL” for liquidating a “contractor” limited company.

  • Use an MVL to return funds to shareholders when more than £25,000 remains;
  • Business Asset Disposal Relief can release funds at 10% tax;
  • Appropriate, low-cost procedure.
  • The most secure way forward is the MVL route.

Separating from your Personal Service Company

Once you have decided to close your PSC, ensure you consider the following IMPORTANT steps to help aid your tax closure in a tax-efficient manner, compliant with the HMRC ruling.

  1. Final Dividends – MVL Tax Efficient once Business Asset Disposal Relief  considered.
  2. Administrative Duties – Use DSO! to commence company strike off. Ensure Interested Parties remain informed, and paperwork completed and submitted.
  3. Deregister for VAT.
  4. Informal Voluntary Strike Off – Consider a Members Voluntary Liquidation MVL?
  5. Profits retained – Profits retained below £23,000 remain subject to Capital Gains.
  6. Member’s Voluntary Liquidation. – liquidation of a solvent company. A tax-efficient liquidation of your limited company.

Company Closure and Contractors – Steps involved in an MVL

  • Contact us by phone or form, so we can discuss whether an MVL offers the best solution with our checklist.
  • Provide a low-cost option to close your company and distribute funds.
  • Appoint us as Licensed Insolvency Practitioners for your MVL.
  • Creditors, including HMRC, can make claims by filing with companies house and advertising in the London Gazette.
  • Company funds transferred to the Liquidators holding account, ensuring distribution to creditors.
  • Distribution of final funds to the shareholder(s) bank account.
  • Formal closure of the limited company with Companies House.

Company closure and contractors IR35 Company Closure – CEST employment tool?

Firstly, check out the ‘check for employment status‘ (CEST) tool to determine whether employed or self-employed.

Company closure and contractors – If inside IR35 or outside IR35.

The decision is based on the nature of your contracts, including responsibilities. However, if changes occur, you must check your employment status.

Following IR35 reform in the public sector, employers remain obliged to use the CEST tool failure, which uses an independent IR35 tool to determine the IR35 liability of contractors.

However, it is essential to recognise that the rules of the IR35 public sector and the private IR35 industry continue changing following recent changes announced by HMRC.

Moreover, this change in IR35 rules can affect the way contractors operate. Therefore, an alternative arrangement may indicate better take-home pay following the enforcement of the public sector reform in 2021.

IR35-Company Closure and Business Asset Disposal Relief

If you sell your business, you can save taxes through Business Asset Disposal Relief.

So Business Asset Disposal Relief allows you to pay tax at 10% on all qualifying assets instead of 18% or 28%

IR35 – Eligibility?

Further, Business Asset Disposal Relief is available on the disposal of all or part of a business that an individual owned, for a minimum of one year, before the date of disposal.

However, the disposal must be assets that comprise the company, not just those used in the business.

So to claim relief, you must perform several conditions within the qualifying time, depending on the type of business disposal you made.

IR35 – Company Closure and the Budget 2018

For disposals of businesses made on or after April 6th 2019, individuals must meet the qualifying conditions for two years to qualify for the relief, up from the previous 12 months. You may view these conditions on the gov—UK website.

We advise you to speak with your tax advisor, but bear in mind the following requirements: –

  • Material disposal of business assets.
  • Disposal associated with material disposal.
  • Trust business assets disposal.

To qualify, dispose of the following:

  1. All or part of your business in which you traded as a Sole Trader or as a – including the business’s assets after closure. You must have owned the business for at least one year.
  2. You owned at least 5% shares in the company and voting rights, but you owned the business for one year minimum before the date you sold or closed it.
  3. Assets you loaned your business or personal company while you traded before its closure.

If you sell all or part of your business, all the following must apply:

  • Where a sole trader or partner in the firm.
  • Owned the business for at least two years before the date of sale.
  • You must sell or dispose of your business assets within three years after selling or closing the business.

When selling shares, the following must apply for at least one year before you sell your shares:

  • Minimum of 5% of shares and voting rights in the company.
  • Employee or director of a company.
  • Company’s activities remain to trade (rather than non-trading activities).

When selling assets you loaned to the business, all the following needs to apply:

  • Your part of the business partnership or your shares in a personal company has been sold and paid;
  • The assets you owned personally. You did, though, lend your business partnership or a private company the use of them for a minimum of one year to the date you sold your business or shares.

IR35 – Company Closure – Company insolvencies and Tax mistreatment

To deal with the mistreatment of InsolvencyInsolvency in the UK, when linked to reducing companies’ tax liabilities. The Finance Bill introduces a new administration that empowers HMRC to secure directors and others associated, then remain jointly and severally liable for the avoidance of the Phoenix debts of a Limited Company.

The intended proposition applies to tax periods ending after the Finance Bill 2019 passed.

HMRC issue “liability notice”, jointly to individuals in:

  • Repeated Insolvency, along with cases where no payment.
  • When a penalty issued for evasion or avoidance.
  • Tax avoidance and evasion.

The UK government knows that most insolvencies result from financial difficulties and that this change targets those who default on TAX payments by design. Measures adopted increase pressure and focus directors on paying taxes, on directors responsible for trading companies while in financial difficulty.

Further information relating to Business Asset Disposal Relief follows:

  • Business Asset Disposal Relief eligibility.
  • Draft Finance Bill 2016 – Corporation Tax, Income Tax and Capital Gains Tax: Company Distributions.

IR35 – Company Closure An MVL Remains a Positive Step

If your company retains cash and wants to reduce your tax liability legally, MVLs remain the most tax-efficient way forward.

HM Revenue & Customs confirms changes to IR35 employment tax. They have been put back due to the Coronavirus COVID-19.

Changes took place in April 2021. Therefore, IR35 will affect how contractors move forward from employment status engaged for tax purposes.

Changes once in place, then expected to have a significant impact on those it affects throughout contracting in the UK.

Company Closure and Contractors – What is IR35?

UK employment law considers a contract of employment exists when a contractual relationship connects “employer” and “employee”. 

Therefore, individuals engaged in offering their services via an intermediary, who then pays them a minimum salary, plus a company dividend, from a stand-alone private limited company. Also, the intermediary is contracted to supply individuals’ services. Then no employment link exists legally, as they remain two separate legal entities and viewed as an intent to bypass the employee tax system, avoiding employment tax and other regulatory issues.

IR35 refers to legislation set up in 1999. The concept reduces tax avoidance by engaging individuals working through a limited company. Individuals also used other intermediaries to be dealt with, not as employees under employment law,

However, the old rule limited HMRC’s enforcement powers, allowing only enforcement against a personal service company or intermediary operating these schemes. 

Pre-April 2021, end-user clients under contractors operated no payroll as not required to. 

So what is changing?

Since April 2021. End-user clients working with independent contractors must undertake detailed assessments to determine if IR35 intercepts individual contractors.

Therefore, they must pay taxes as an employed person. However, being a complex issue, this will not be without problems. To be interpreted correctly, it will require tax and legal support.

In the case of IR35, which remains viewed as IR35, those end users will be obliged to inform the intermediary—and then require PAYE to be applied as an employee to move forward. In the case of contractors engaged by agencies, TAX obligations then transfer to them.

Furthermore, a time limit is set, so resolution points that require further professional support are dealt with within a prescribed time limit.

IR35 Latest November 2020

April 2020 was the time for changes to “off-payroll working” legislation. However, they remain unchanged due to the Coronavirus COVID-19 pandemic. 

HMRC notified UK businesses to prepare for IR35 legislation to take effect in April 2021.  

Gordon Brown, the Chancellor at the time, in the Pre-Budget speech of ’99. Expressed the ‘Intermediaries Legislation’. IR35 was correctly completed in the Finance Act for April 2000 to ensure contractors pay similar taxes as employees. The legislation was introduced to prevent individuals who would otherwise be taxed as employees from lessening their tax responsibility by giving services within a service company. The rules do not apply, however, if the individual remains legitimately self-employed.

HMRC examined the IR35 rule, concluding that non-compliance generally as intermediaries wrongly construing themselves as “self-employed”  and not implementing the IR35 rule. The HMRC review concluded that compliance would increase if the final duty for managing status and administering PAYE moved from the intermediary to the end-user of the service. 

Final service end-users remain expected to be a more notable company. HMRC thought compliance would be more comprehensive once changes were introduced, and HMRC revenues would increase.

Updated IR35 rules introduced in April 2021. Changes were considered complicated. The end-user must assess whether the contractor remains employed for tax purposes. If yes, ensure the correct accounting of PAYE.  

Before April 2020, contractors and end-users in the UK struggled to use the rules to existing arrangements. However, implementation of the changes remains delayed until 2021 due to the Coronavirus COVID-19 pandemic.

Publication of the HMRC October Employer bulletin details to be effected, and suggest April 2021 as the start date. 

Moving forward

Therefore, parties to any impacted contractor arrangements should review prior planning in preparation for changes or start planning now. In 2019, HMRC wrote to GSK contractors. Therefore, fuelling that Life Science businesses may indicate HMRC attention. Perhaps the time to consider a change?  

Therefore, any UK company that engages intermediaries must review their arrangements and make “status determinations” for each arrangement. Therefore, the results determine other alternative engagement criteria for existing or prospective formations to reduce risk.

An individual involved in an intermediary may want to gain a first-mover advantage and provide information that supports the end user in determining their status. In the absence of this, they should look at how they can protect their net income. Individuals may consider it better to provide their services directly than indirectly. 

Risks?

If you have not complied and correctly operated legitimately? Then costs can escalate, with penalties of 100% on income tax and NICs avoided.

So for further help on IR35, please contact the team at HBG Advisory on: 0330 056 3120

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