IR35 Close LTD Company
Many one-man and woman bands choose to operate as a personal service company, and until the IR35 tax reforms, this typically worked well. However, IR35 reforms have led to many contractors no longer being able to secure a job outside IR35 and no longer needing their limited companies. In this article, we will explain everything you need to know about IR35 and closing your ltd company.
What is IR35?
IR35 is a tax legislation that means contractors are eligible to pay tax, just like employees working under a limited company. The rules of IR35 were first introduced as a way of ensuring that contractors and companies were not attempting to avoid their tax duties.
Off-payroll working was first introduced in 2017 to public sector services. This new set of rules means that organisations would have to pay more income tax for those working as contractors within their company.
In April 2021, this law was extended to private sector organisations too. However, it is worth noting that these rules currently only apply to medium and large organisations. The original IR35 rules remain in place when a contractor provides services to smaller organisations (less than 50 employees).
There may still be reasons why the rules may not apply to your current limited company structure. Use an IR35 calculator so that you can be confident that you are following the correct rules for your circumstances. This means being aware of your personal tax liabilities.
How to close a limited company due to IR35
Could these IR35 reforms affect the way that you operate as a contractor? Are you thinking that maybe you’d be better off closing your limited company and operating as an employee for a company? Or are you now unable to secure a job through your ltd company? We’re here to help if you’re closing a limited company due to IR35.
If you’ve decided that you may be better off closing your company as you no longer need it, the first thing you should do is seek independent advice on the options that you have available.
Depending on your business’s financial circumstances, there are different routes that you can take to close your company.
How does IR35 affect my options when it comes to closing my company?
A solvent company is one that can afford to pay its debts when they fall due. You must also be able to pay any outstanding debts within 12 months of company closure. In this instance, the most appropriate method of liquidation would be either a members voluntary liquidation or a company strike-off. A members voluntary liquidation would only be suitable if you have over £25,000 left in the business once all debts are paid.
An insolvent company is one that cannot afford to pay its debts when they fall due. If insolvent and you act fast enough, you may be able to use a voluntary liquidation procedure. If you fail to act quickly enough, you may be forced into compulsory liquidation through a winding-up petition.
Members voluntary liquidation: IR35 Close LTD Company
For some contractors, using a members voluntary liquidation (MVL) is an appropriate structure for closing a limited company. It is also the most tax-efficient option. In order to qualify for a member’s voluntary liquidation, you must have a solvent limited company.
One of the biggest tax benefits associated with using a member’s voluntary liquidation in these circumstances is that any money you receive from the company is classed as capital rather than dividends. This works better from a tax perspective as you will only need to pay Capital Gains tax rather than income tax. This is charged at a lower tax rate.
In a member’s voluntary liquidation, a licensed insolvency practitioner is appointed to take care of the liquidation.
As we always recommend, you should ensure that you get all liquidation prices in writing from your licensed insolvency practitioner. Licensed insolvency practitioners use different pricing structures, so make sure you know what is involved.
Creditors voluntary liquidation: IR35 Close LTD Company
For some companies, a member’s voluntary liquidation is not an option due to the company being insolvent. You may still owe corporation tax and have not repaid all of your bounce-back loan. If you believe your limited company is insolvent, you will most likely enter a creditor’s voluntary liquidation.
In a creditors voluntary liquidation, a licensed insolvency practitioner is appointed to close the company down, and all unsecured debts are written off. You should also seek expert advice on any bounce-back loans if you have taken one out and are unsure if you have spent it correctly.
In a creditors voluntary liquidation, it becomes even more important that all aspects of your business are considered before you appoint an insolvency practitioner. In particular, if you have an overdrawn director’s loan, because you may be liable to pay back the money that you have essentially borrowed from the company.
A company dissolution may only be used when all company debts have been paid off, or if the company only owes a small amount to the HMRC; it cannot be used if your company has taken a BBL and not paid it back. If you apply without paying off debts, you could be made personally liable to pay them back.
This type of closure is also referred to as a strike-off, and it involves you filing a DS01 form. This form can be downloaded online, and you will pay just £10. Upon completion, you must send the form to Companies House. They will advertise your closure. If there are no objections, the company will be closed. If you owe any creditors, such as HMRC, you must also write to them at the same time to inform them of the strike-off.
Why IR35 is causing more issues for contractors wanting to close their companies
Many self-employed contractors pay themselves a small salary which they can top up using dividends. This would typically cause no problems; however, the loss of work caused by the pandemic led to many contractors having no work while still taking this money out of the business.
The Government furlough scheme wasn’t too helpful as it only covered the small amount of money taken as a salary. Many contractors then had to use the bounce-back loan to top up their earnings. Due to a lack of business, many contractors have found themselves having an overdrawn director’s loan account.
We’ve heard from contractors who signed for a £3500 liquidation, thinking that would cover everything. Fast forward to now, and they’ve been hit with a £69,752 bill for an overdrawn directors loan that they didn’t know existed.
If you’re a contractor who owes a bounce back loan and HMRC, your liquidation should be straightforward. In most cases, the director has nothing to worry about.
If you are a contractor who needs to close their limited company, it’s important you get advice early and make sure that you understand your position in full before you make a decision.