IR35: Closing my limited company
Many 1 man and woman bands chose to operate as a personal services 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. If you’re thinking of closing your company due to IR35, we’re here to help.
What is IR35?
IR35 is a tax legislation that means that 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. Not following IR35 meant that organisations employing contractors could avoid contributions to their national insurance and other payments. This is because this type of employment is often described as ‘disguised employment’.
Many contractors provide their services through an intermediary. This means that as a contractor, you are providing services for a limited company through a third-party organisation. In this case, many third-party organisations are agencies who are sourcing individuals with relevant skills to take on a specific job. Others can include personal service companies. There is a specific intermediary legislation that should be followed by these organisations.
Off payroll working
Off payroll working was first introduced in 2017 to public sector services. This new set of rules essentially 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. 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 is providing 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, therefore you should utilise an IR35 calculator so that you can be confident that you are following the correct rules for your circumstances.
How to close a limited company due to IR35
Do you think these IR35 reforms could 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? 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 an up-to-date version of your company accounts. You could then seek independent advice from an insolvency professional who can assess your situation and make you aware of the worst-case scenario.
Depending on your business’s financial circumstances, there are different routes that you can take to close your company.
Members voluntary liquidation: IR35 company closure
For some contractors, using a member’s 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. If you are still able to pay suppliers on time and any outstanding debts can be paid within 12 months of company closure, you likely have a solvent 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 company closure
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 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.
No liquidation process is free and therefore it’s usually a good idea to see if you are eligible to claim director redundancy pay. This often really helps limited company directors when dealing with liquidation costs. The average claim is £9,000 which is more than enough to pay the liquidation fees.