Changes to IR35 legislation, also known as intermediaries’ legislation, have had an adverse impact on many contractor companies, with some directors looking for the most efficient way to close down their firm.
Responsibility for determining a contractor’s employment status now lies with their end-clients - a change that was introduced to prevent ‘disguised employment.’ This situation might occur if a contractor’s working practices are viewed as the same as an employee’s, and makes the contractor subject to tax and National Insurance as an employee.
If you’re considering closing your solvent contractor company because of the changes to IR35 you have two choices of closure, with the most appropriate one depending on your level of retained profits.
If you have retained profits of less than £25,000 you can close down your company yourself via voluntary dissolution. You’ll need to inform HMRC of your intention to close, file your company accounts, close the business bank account, and transfer any assets out of business ownership.
You can use Form DS01 to dissolve your company, and there is a cost of £10. Bear in mind that if you don’t inform all your creditors, however, the company could be reinstated at any future point.
It’s crucial to ensure the business is solvent and can pay all its creditors, otherwise you may be investigated by the Insolvency Service at a later date. Additionally, HMRC can launch an investigation if they believe anomalies exist in your historic tax affairs, so it’s worthwhile seeking professional advice before taking strike off action.
Members’ Voluntary Liquidation is a formal method of closing down your IR35 contractor company if it has retained profits of £25,000 or more. It involves the appointment of a licensed insolvency practitioner (IP), who conducts the process and ensures you meet all the statutory requirements.
Again, this procedure is only available for solvent businesses that can pay all outstanding debts, plus interest, within 12 months of closure. MVL is an extremely efficient way to close the company from a tax perspective, as distributions are taxed as capital gains rather than income tax.
A further benefit is the potential for your tax liability to reduce to 10% if you’re eligible for Asset Disposal Relief. This was formerly known as Entrepreneurs’ Relief (ER), and enables you to access your monies in a tax-efficient manner.
If your company is insolvent, you must close it down using a different method called Creditors’ Voluntary Liquidation (CVL). Again, a licensed IP is appointed to realise your business assets and distribute the funds to creditors as far as possible.
As a company director you may be able to claim redundancy pay if you enter Creditors’ Voluntary Liquidation. Average redundancy claims for directors currently stand at around £9,000, which could help you pay for the process.
The complex rules and regulations that affect IR35 contractor companies have meant closure for many. If you’re considering closing down your company because of the change in IR35 rules, it’s highly advisable to seek professional guidance on the most effective method.
All three of these closure processes result in your company being struck off the register at Companies House, and seeking specialist assistance can prevent further issues emerging in the future, such as a tax investigation by HMRC.
UK Liquidators are liquidation specialists and have extensive experience of helping contractor companies to close down in the most efficient way. Please get in touch with our partner-led team to find out more. We offer free, same-day consultations, and operate from a network of offices nationwide.
If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner can help you understand your options.
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