As HMRC have tried to put a stop to people using limited companies as a means of tax avoidance, then what are your options.
Are you left with a business you need to close?
HMRC’s IR35 reforms have had a huge impact on contracting. Many UK limited companies are needing to be closed properly and there are a few business closure solutions available including MVLs, CVLs and dissolving your company.
In this guide to IR35 Reforms, we will explain everything connected to closing PSC contractors businesses.
Table of Content
Will IR35 Change the Private Sector?
IR35 reforms within the private sector will transform the way contractors and other off-payroll workers operate and pay tax.
The changes will not only affect contractors, but also the companies (or end clients) that engage their services as the onus will now be on them to ensure contractors fall outside IR35 legislation and are therefore rightly classed as a true contractor rather than a ‘deemed employee’.
Many contractors will be switching to an employed position with Personal Service Companies (PSCs) no longer required.
Covid-19 Challenges
The challenges from Covid-19 has led to many PSC contractors securing reduced trade or in some cases no work coming in at all as contracts are put on hold by companies keen to see how the situation pans out before committing to future projects.
While the UK government created initiatives such as the Coronavirus Job Retention Scheme (CJRS) which allowed employees to be furloughed and the Self-Employed Income Support Scheme (SEISS) has been a lifeline, many still are struggling.
PSC contractors operating within a limited company structure do not qualify for SEISS, while the CJRS is also not appropriate for those who typically take their income from the company through dividends.
So many PSC contractors have felt forced into taking out a government-backed loan either through the CBILS or Bounce Back Loan Scheme in order to help support themselves during the pandemic.
While these government-backed loans may well have been taken out in good faith, the reality is the prolonged restrictions on trade mean many will now not be in a position to begin making repayments towards this loan due to continued diminished trade.
A combination of these factors means that many contractors who would have been in a solvent position 6-12 months ago have found themselves with no money coming in and relying on the funds within the company to meet their daily living costs, pushing them to a state of insolvency.
What Solutions Are Available To Close Personal Service Company
Closing down an unwanted PSC can be achieved in several ways.
Due to IR35 reforms here are the best business closure solutions:
You can find more information here on how you can close a limited company.
Creditors Voluntary Liquidation (CVL)
The Creditors Voluntary Liquidation (CVL) route is taken if the company is insolvent at the time of closure.
If your Personal Service Company is insolvent, you should seek help and advice from a licensed insolvency practitioner.
There are a range of business rescue and recovery options but with the changes to IR35, you may wish to consider placing the company into liquidation by way of a CVL.
A CVL is a formal process that brings about the end of an insolvent company. The appointed insolvency practitioner will handle the whole process on the company’s behalf including liaising with any outstanding creditors. Any debt which remains at the end of the liquidation will be written off unless this has been secured with a personal guarantee.
If interested in speaking to a professional CVL debt advisor check out the list of best CVL companies in the UK.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation (MVL) route is taken if the company is solvent at the time of closure.
MVL’s allow a solvent company to be closed and profits extracted in a cost-effective and tax-efficient manner.
Business owners can use the Business Asset Disposal Relief (aka Entrepreneurs’ Relief) which could lower the rate of tax paid.
Dissolving Company
Dissolving the company at Companies House is a way to close your company.
To apply to strike off your limited company, you must send Companies House form DS01.
It takes a minimum of three months from the time of application to dissolution – this is the time in which creditors can object.
Depending on the structure and complexity of your business, however, the process can take a great deal longer.
Sometimes it is easier to speak with a specialist business advisor on best practices to suit your circumstances.
Popular Questions
What is PSC contractor?
A PSC contractor is a limited company set up by a contractor to provide its services to clients. It is set up by self-employed workers, contractors and consultants in a way of tax planning.
PSC contractors stand for “personal service company” and in the context of IR35 is the off-payroll working definition.
The personal service company is not working directly for clients or taking up employment with other businesses, but is operating through their own company.
The future of PSC contractors within the private sector is far from clear.
Can HMRC investigate a closed company?
HMRC can investigate a closed company and take action against directors.
Even if you manage to successfully strike off a company with tax debts, HMRC will still be able to take action against the dissolved company to recover the money it is owed.
Do I still pay corporation tax if inside IR35?
Inside of IR35 employment taxes will be deducted by your client.
When calculating Corporation Tax employment payment and Class 1 Employer NICs can be deducted, so this will reduce your Corporation Tax bill.
You still need to pay Corporation Tax on profits in May 2024, even if inside of IR35.
IR35 Solutions for Businesses
With the new IR35 changes many businesses and workers are looking for solutions in May 2024.
Can I avoid IR35?
You can avoid IR35 altogether by rewarding yourself for all work done in a form subject to PAYE.
IR35 was intended to stop the avoidance of tax and national insurance contributions.
If there is no avoidance through PAYE there will be no IR35 liability.
Is there a way out of IR35?
The most effective way around IR35 is via an umbrella company.
An umbrella company hire self-employed individuals to their payroll and designate them as an employee in the eyes of HMRC.
Adding the employees to PAYE bypasses the need for IR35.
What happens if you dont comply with IR35?
If you do not comply with IR35 rules you will receive a penalty of 30% of unpaid tax if HMRC deems that you were careless about your employment status.
Contractors caught inside IR35 with a wrongly designated employment status will have to pay back all taxes owed + 30% penalty.
Does IR35 apply self employed?
You are not affected by IR35 if you are a sole trader.
The legislation applies only to incorporated companies.
The rules of employment status (closely tied to IR35) affect everyone who provides a service to a client including sole traders.
Check out this guide for more information on self-employed debt help.
Summary
If you decide to cease trading via your limited company following the private sector IR35 changes you should take great care when choosing the best way to exit.
If you are solvent with more money in the business than debts we feel the MVL solution is the best for you.
If you are insolvent with more debts than money in the business we feel the CVL solution is the best for you.
Many large businesses in the UK are dependent on small PSC contractors and the IR35 reform poses a real threat for the self-employed.