If you decide to cease trading via your limited company following the private sector IR35 changes in April 2020, you should take great care when chosing the best way to exit, as well as the alternative ways to operate as a contractor.
Background to the private sector off-payroll changes
IR35, also known as ‘intermediaries’ legislation’ or ‘off-payroll rules’ has been in existence for nearly two decades, however, recent amendments made to the ruling significantly changes the way the employment status of PSC contractors is determined. The tax avoidance measure attempts to tackle disguised employment, deterring full-time employees from leaving work on a Friday and returning to work on the Monday as a limited company contractor to reap the tax benefits.
The IR35 reform in the public sector came into force in April 2017, marked by a string of high profile HMRC investigations taking place shortly after. Ongoing legal battles targeting the likes of high-profile television personalities, multinational pharmaceutical companies and even HMRC’s very own contractors, sends the message that HMRC is determined to actively and ferociously investigate those under their radar.
The reform which is set to be extended to the private sector in April 2020 shifts the responsibility of determining IR35 status from the contractor to the end client. Shortly after the public sector reform announcement, HMRC launched its Check for Employment Status (CEST) tool. The CEST tool has been the subject of controversy as after rigorous testing, it was discovered that the tool generated flawed assessments contradicting determinations from landmark IR35 court cases.
As more contractors are being caught in the IR35 battle, a series of high profile projects have experienced a slowdown or even shut down as contractors no longer find it financially beneficial to operate through a PSC or accept contracts of this nature.
As a result, it may be more cost-efficient for contractors caught under IR35 post-April 2020 to explore alternative ways to operate. You should take careful consideration as this will directly determine your take-home pay, explains Keith Tully of Real Business Rescue, partner at national restructuring and turnaround service for businesses in financial distress, offering IR35 liquidations for contractors.
Members’ Voluntary Liquidation
A Members’ Voluntary Liquidation (MVL) is a cost-efficient exit procedure for limited companies with retained profits over £25,000. If it is lower than this, it may be more tax-efficient to dissolve the business. Before seeking a MVL, you will need to settle your debtor’s book, ensuring that any outstanding debts have been collected or paid.
The formal process requires a licensed insolvency practitioner to be appointed due to the complexity of the procedure and to ensure that funds have been distributed in a responsible and compliant manner. Funds distributed will be treated as capital and therefore subject to Capital Gains Tax which is a lower tax liability than if the funds were treated as income. You may be eligible for Entrepreneurs’ Relief which grants a reduced tax rate of 10 per cent. This is now known as Business Asset Disposal Relief.
If you are looking to close your limited company ahead of the IR35 Private Sector reform, speak to a knowledgeable licensed insolvency practitioner to ensure that it’s the best option for you.
Dissolving your limited company
You may consider company dissolution which consists of the strike off of your business from the Companies House register, ceasing in legal existence.
It’s important to note that if you expect to work on more than one contract during the same time period and your secondary contract is outside IR35, you may consider running this through your limited company, taking advantage of your dividend allowance. If you expect to resume trading through your limited company at any point, consider registering your company as dormant which makes it easy to revive your business at any given point.
Limited company closure checklist
Ahead of dissolving or liquidating your limited company, you will need to pay heed to certain final responsibilities to Companies House to complete the closure of your limited company.
If you decide to take the formal route of a Members’ Voluntary Liquidation, you will need to appoint a licensed insolvency practitioner to kick-start the procedure. The appointed professional will be responsible for managing the company affairs, ensuring that you make a cost-efficient exit.
DS01 Form (Dissolve Route) – If you decide to dissolve your limited company in preparation of the IR35 reform, you will need to complete a DS01 form (strike-off application). This document will require a signature from a majority of directors and distributed to shareholders, creditors, employees and any co-directors who have not signed the form.
Deregister & Discharge from liabilities – To successfully dissolve or liquidate the business, you must fulfil your reporting duties, such as Company Tax Return and Company Accounts. You will need to ensure that any outstanding financial liabilities with HMRC have been met, including National Insurance Contributions, Corporation Tax and VAT.
Inform HMRC – Write to HMRC to request deregistration of VAT or deregister from VAT online. You will typically receive confirmation in three weeks which also officially marks your final day of trading.
Retained Profits – How you withdraw retained profits will be determined by the company closure route you wish to take. If you turn to an MVL, retained profits will be treated as capital and therefore subject to Capital Gains Tax (CGT). If you are eligible to claim Entrepreneurs’ Tax Relief, you will be subject to CGT at a rate of 10 per cent, resulting in significant tax savings. If you no longer require your limited company as a result of being caught by IR35 following the April 2020 reform, a Members’ Voluntary Liquidation may be a cost appropriate measure for you.
Alternative operating structures post-April 2020 – Umbrella/PAYE
As an alternative to working through a limited company, you may consider operating as an umbrella employee, subject to PAYE tax treatment. If caught by IR35, you will be required to pay National Insurance Contributions and Income Tax, so it may be worthwhile to explore which option results in higher take-home pay. The maintenance costs associated with running a limited company are high, so an alternative way of working may be better suited and cost-efficient.
IR35 reform as it is now
The measure which was originally pushed back following backlash from industry bodies is set to come into force in April 2020. The extension means that if you’re a contractor working for a medium to large business with 50 employees or more, the responsibility for determining your employment status for tax purposes will be transferred to the end client. The move protects small traders, as only medium to large businesses will be required to take on the weight of the task.
The IR35 reform in the private sector is made up of a few key points:
Status determination statement – The status determination statement is evidence that each contractor has been assessed for IR35 status, including a supporting explanation attached.
Disagreement process – If a contractor disagrees with the IR35 determination, they can lodge a notice of disagreement. Following this, the end client is required to review the decision and provide a response within 45 days. In the event of an IR35 inquiry, it is important to have tax insurance in place or carry out external IR35 assessments for extra assurance.
After months of hard-hitting criticism and ongoing targeted IR35 cases, the government stand accused of misunderstanding the legislation after winning just one out of six IR35 cases. As a result, IPSE, the professional body for self-employed professionals, labelled the IR35 reform – ‘disastrous anti-business legislation’. On the other hand, the treasury defends the measure, recognising it as a powerful deterrent for non-compliant contractors having raised £550m in taxation within the first 12 months of enforcing the public sector reform.
Many large businesses are dependent on small contractors and the IR35 reform poses yet another thorn for the self-employed. In preparation for those due to work on contracts caught by IR35, alternative operating structures may be better suitable. Some may be biding their time, waiting to experience the true extent of the measure post-April 2020; however, closing shop ahead of the reform is on the agenda for many looking to maximise take-home pay through alternative measures.
Here are some other useful guides related to the April 2020 IR35 private sector reforms: