IR35 legislation is changing from April 2021, when new rules will affect contractors who run their businesses through an intermediary, as well as their private sector end-clients. Responsibility for status determination, and in some cases for paying ‘off payroll’ tax, will change the working arena for contractors and clients alike.
In the past, contractors have typically been responsible for determining their own status, but under the new rules, this responsibility has been transferred to the end-client. HMRC believes that using an intermediary, such as a limited company, gives rise to ‘disguised employment,’ and that if the intermediary wasn’t there the contractor would be an employee, and therefore subject to income tax and National Insurance.
The IR35 changes are intended to recognise more cases of ‘disguised employment,’ where under further scrutiny, an individual routinely working for the same client under a contract may be classed as an employee.
Public sector end-clients have been required to determine a contractor’s status since 2017, and the changes mean that medium-sized and large-sized private sector end-clients must now do the same.
Determining whether or not a contractor falls inside or outside IR35 legislation can be a complex process, however, and involves taking account of the nature of the working relationship – including how much control the contractor has over when, where, and how they work.
HMRC is trying to reduce the potential for ‘blanket determinations’ being made on contractor working arrangements, and ensure the necessary consideration is afforded to contracts individually.
The changes in IR35 legislation mean that, if a contractor is now considered to be ‘inside IR35,’ it will significantly reduce their income given the liability for income tax and National Insurance.
For fee payers, which might be the hiring client or an agency, the liability to pay the contractor’s employment taxes will also have a serious financial impact, and may result in fewer arrangements being made with individual contractors.
This clearly has serious implications for contractor businesses, so how would a contractor close down their business if they see no future for this working model?
If a contractor’s business model is no longer viable in the long-term due to the changes in off-payroll working, their company would need to be closed down. Assuming that the business is solvent, company dissolution, or a formal liquidation procedure called Members’ Voluntary Liquidation (MVL) could be used.
Dissolution is typically suitable for companies with relatively few assets. It’s an uncomplicated and inexpensive process, but if the company is likely to distribute £25,000 or more, a Members’ Voluntary Liquidation would offer significant tax benefits.
Distributions from an MVL are taxed as capital rather than income, which considerably reduces a contractor’s tax liability on closure, but there may also be further benefits available.
If a director is eligible to claim Business Asset Disposal Relief – a tax relief formerly known as Entrepreneurs’ Relief – the rate of Capital Gains Tax is reduced to 10% on qualifying gains, with a lifetime limit of £1 million.
Individual taxpayers also benefit from an annual exempt amount. This currently stands at £12,300 for the tax year 2020/21, and means there is no tax to pay on capital gains up to this sum.
If you would like more information on the changes to IR35 legislation in 2021, or guidance on contractor liquidations, please contact our team of experts at UK Liquidators to arrange a free same-day consultation.
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