IR35 – Company Closure
IR35 – Company Closure. Contractors use an MVL (Members Voluntary Liquidation) as a tax-efficient solution to close down their limited company. Therefore, allowing distributions to shareholders and tax savings through “Entrepreneur’s Relief”.
IR35 refers to anti-avoidance UK tax legislation intended to tax ‘cloaked’ employment at a rate comparable to employment.
The benefits of an “MVL” for liquidating a “contractor” limited company.
- Use an MVL to return surplus funds to the shareholder(s) in a tax-efficient manner when more than £25,000 remains to be paid to shareholders.
- Entrepreneurs’ relief, if eligible, can release funds at just 10% tax.
- Appropriate and straightforward, low-cost procedure.
- Take the MVL route that so many contractors have decided upon as the most secure way forward.
Separating from your Personal Service Company
Once you have determined to close your PSC, ensure you consider the following IMPORTANT steps to help aid your tax closure in a tax-efficient manner compliant with HMRC ruling.
- Final Dividends – MVL Tax Efficient once Entrepreneurs Relief considered.
- Administrative Duties – Use DSO! to commence company strike off. Ensure Interested Parties informed and paperwork completed and submitted.
- Deregister for VAT.
- Informal Voluntary Strike Off – Consider a Members Voluntary Liquidation MVL?
- Profits retained – Profits retained below £23,000 mean subject to Capital Gains. Greater than the subject to Income Tax.
- Member’s Voluntary Liquidation. – liquidation of a solvent company. A tax-efficient way to liquidate your limited company.
Steps involved in an MVL
- Contact us, By phone or form, to discuss whether an MVL offers the best solution with our simple checklist.
- Provide you with a low-cost option to close your company and distribute funds.
- Appoint us as Licensed Insolvency Practitioners for your MVL.
- Statutory filing with companies house and advertising in the London Gazette to allow creditors, including HMRC, to make any claims.
- Company funds transferred to the Liquidators holding account, ensure all creditors, if any, paid.
- Distribution of final funds to the shareholder(s) bank account.
- Formal closure of the limited company with Companies House.
IR35 Company Closure – CEST employment tool?
Firstly, check out ‘check for employment status’ (CEST) tool to determine whether employed or self-employed.
If inside IR35 or outside IR35.
The decision based on the nature of each of your contracts, including responsibilities. Therefore, in the event of any changes, you need to review your employment status.
Following IR35 reform in the public sector, employers remain required to use the CEST tool failure which use an independent IR35 tool to determine the IR35 liability of contractors.
However, essential to realise, that IR35 public sector and IR35 private sector rules modify following recent changes declared by the HMRC.
Moreover, this change in IR35 rules can affect the way contractors operate. Therefore, an alternative arrangement may indicate a better take-home pay following the enforcement of the public sector reform in 2021.
IR35-Company Closure and Entrepreneurs Relief
When you sell your business, you can pay fewer Capital Gains Tax via Entrepreneurs Relief.
Entrepreneurs Relief allows you to pay tax at 10% on qualifying assets, instead of 18% or 28%
additionally, Entrepreneurs’ tax relief remains available up to £10 million lifetime gains, so your tax-saving of £1,800,000.
IR35 – Eligibility?
Further entrepreneurs’ tax relief available on the disposal of all or part of a business that an individual has owned, for a minimum of one year, before the date of disposal.
The disposal must be assets comprising the company, and not just of assets used in the business.
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 6 April 2019, individuals required to meet the qualifying conditions for two years to qualify for the relief, up from the current 12 months. You may view these conditions on the gov—UK website.
We advise that you speak with your tax advisor, but bear in mind, the following requirements: –
- Material disposal of business assets
- Disposal associated with a material disposal
- Trust business assets disposal
To qualify, dispose of the following:
- All or part of your business in which you traded as a Sole Trader or as a – Including the business’s assets after closure. The business had to have been owned by you, for at least one year.
- 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 sell or close it.
- 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:
- Were a sole trader or a partner in the firm.
- Owned the business for a minimum of one year before the date of sale.
- You must sell or dispose of your assets that belonged to the business, within three years after selling or closing the business.
- 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 granting HMRC ability to secure directors and others associated, then remain jointly and severally liable for the avoidance, or the phoenix debts of a Limited Company.
The intended proposition applies to tax periods ending after the Finance Bill 2019 passed.
HMRC can issue a liability notice jointly to individuals in:
- Repeated Insolvency, along with cases where there had been no payment.
- When a penalty has been 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 set out to default on TAX payments by design. Measures adopted, increase pressure and focus directors on paying tax, on directors responsible for trading companies while in financial difficulty.
Further information relating to Entrepreneurs relief follow:
- Entrepreneurs 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 want to reduce your tax liability legally, MVL’s 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 remain expected to take place in April 2021. Therefore, changes to 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.
What is IR35?
UK Employment law, consider that 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 has contracted to supply individuals services. Then no employment link exists legally as they are two separate legal entities. They are thus viewed possibly 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 was to reduce avoidance of tax engaging individuals working while operating 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 personal service company or intermediary operating these schemes.
Pre-April 2021, end-user clients under contractors operate no payroll as not required too.
So what is changing?
Come April 2021. End-user clients working with independent contractors remain required to undertake detailed assessments so they may determine if IR35 intercepts individual contractors?
If so, they then are required to pay tax as an employed person. However, being a complex issue, this will not be without problems. For it to be interpreted correctly, will require tax and legal support.
Leading up to cases which remain viewed as IR35 not applying then those end users will be obliged to inform the intermediary—then requiring PAYE to be applied as an employee to move forward. In the case of contractors engaged by agencies, TAX obligations then transfer over to them.
Further, a time-limited period is set, so points of a resolution requiring even further professional support are dealt with within a prescribed time limit.
IR35 Latest November 2020
April 2020 was to be the time for changes to “off-payroll working” legislation was due to change. However, they remain unchanged due to the Coronavirus COVID19 Pandemic.
HMRC notified UK businesses to prepare for IR35 legislation to take effect in April 2021.
The Chancellor at the time, Gordon Brown, 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 tax as employees. The legislation was to prevent individuals who would otherwise be taxed as employees lessen their tax responsibility by giving services within a service company. However, the rules do not apply if the individual remains are legitimately self-employed.
HMRC examined the IR35 rule concluding non-compliance generally as intermediaries were wrongly interpreting 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 end-users of service remains expected to be a more notable company. HMRC thought that once changes introduced, compliance would be more comprehensive and HMRC revenues increase.
Updated IR35 rules were due to be introduced in April 2020. Changes were considered complicated. The end-user remained required to assess whether the contractor for tax purposes remains employed? If yes, then ensure PAYE accounted for correctly.
Before April 2020, contractors and end-users in the UK struggled with the utilisation of the rules to existing arrangements. However, implementation of the changes remains delayed to 2021 due to the Coronavirus COVIS19 Pandemic.
Publication of the HMRC October Employer bulletin details to be effected and suggest April 2021 as the start date.
Therefore, parties to any impacted contractor arrangements should, review prior planning in preparation for changes or commence planning now. In 2019, HMRC wrote to contractors of GSK. Therefore, fueling that potentially Life Science businesses may signify HMRC attention. Possibly now is the time to consider a change?
Any UK business engaging intermediaries need to review their arrangements and provide “status determinations” for every arrangement. The results of which will, therefore, determine other alternative engagement criteria for existing or prospective formations to lessen risk.
An individual involved within an intermediary might want to attempt first-mover advantage and render information which might support the end-user with their status determination. Failing this, they should look at how they may shield their net income. Individuals may consider it may be better to offer their services directly rather than indirectly.
If you have not complied and correctly operated legitimately? Then costs can escalate with penalties of 100%on the income tax along with NIC avoided.
For further help on IR35, Please contact HBG Advisory on: