IR35 Changes. Do you need to close your company as a result?
What are the options for closing IR35 contractor limited companies?
IR35, also known as the Intermediaries Legislation, is a complex set of HMRC rules that are used to determine whether a contractor should be treated as an employee or self-employed for tax purposes. IR35 came into force in April 2000, and has had a number of changes since, with the most recent significant reform coming in April 2021. This reform has had an adverse impact on many contractor companies, with some directors looking to find the most efficient way to close their company down.
Elaine Wilkins, at our Bournemouth office reports that:
“We have had a number of enquiries from directors of contractor companies in recent months about their best course of action following the recent IR35 reforms. There is certainly some confusion around IR35 and directors are looking for clarity.”
In this article, we briefly look at what the reforms are and why it is having an adverse effect on some contractor companies, before looking at the most efficient ways to close down a contractor company – either solvent or insolvent.
The April 2021 IR35 Reforms and why they are important
Prior to April 2021, contractors were typically responsible for determining their own employment status. Under the new rules, this responsibility passed to the end-client. Public sector end-clients had been required to do this since 2017, and the 2021 reforms meant that medium and large sized private sector end-clients now had to do the same.
On the face of it, this might not seem a big change. However, quite apart from it being a complex and time-consuming process to determine whether a contractor falls inside or outside IR35, the implications for contractor companies and the end-clients are significant, for two main reasons:
- Is the contractor considered to be inside IR35? If yes, then it is likely that the contractor’s income will be significantly reduced as they will become liable for income tax and National Insurance on their remuneration from their end-client as if they were employees.
- What about end-clients? For end-clients, which might be the hiring client or an agency, they become liable to pay the contractor’s employment taxes, which could have a material financial impact, as well as leading to fewer arrangements with contractors.
The potential outcome for contractor businesses is that the changes mean it is no longer viable for directors to operate their businesses in the long-term and that closing down the business becomes an option.
If the business is solvent, there are two options for closing it down, with the choice depending on the level of retained profits.
Closing a solvent IR35 limited company – Company Dissolution or Members Voluntary Liquidation.
- Voluntary Company Dissolution. Sometimes known as striking off, this option is an informal way of closing down a company that is no longer required when retained profits are less than £25,000. It can be a quick and simple process, but directors need to: inform HMRC of their intention to close; file their company accounts; close the business’s bank account; transfer any assets out of the business’s ownership and inform all the business’s creditors.
If using this method, the business must be solvent and able to pay all its creditors. If not, an Insolvency Service investigation might take place, with possible outcomes being insolvency claims against the directors personally and/or director disqualification. For this reason, it is sensible to consider taking advice from an Insolvency Practitioner before dissolving a company.
- Members’ Voluntary Liquidation (MVL). This option is for when retained profits are greater than £25,000 and requires the appointment of a Licensed Insolvency Practitioner. As with company dissolution, this option is only available for solvent companies that are able to pay all their creditors in full (plus any interest) within 12 months of closure.
With MVLs, there is also the possibility that, under current legislation, the tax liability might be reduced to 10% with eligibility for Business Asset Disposal Relief (BADR – formerly known as Entrepreneurs’ Relief). Currently BADR has a lifetime limit of £1m per person and is available to those disposing of the shares of a trading or holding company or group in which they have held at least 5% of the voting rights for at least two years. Eligibility for BADR makes an MVL a particularly tax efficient process.
Closing down an insolvent IR35 limited company
If, however, the company is insolvent, it must be closed down using a Creditors’ Voluntary Liquidation (CVL). As with an MVL, a Licensed Insolvency Practitioner must be appointed in order to realise the business’s assets and distribute the remaining funds to creditors.
It is also worth knowing that company directors might be able to claim redundancy pay if the company enters a Creditors’ Voluntary Liquidation.
Take a look at our CVL infographic for a quick summary of the steps involved.
Talk to us about closing down your IR35 contractor company
IR35 rules that affect contractor companies, particularly post the April 2021 reforms, are complex and have already meant closure for many companies. Our experiences show that we know that many more are considering closing as a result.
Our Licensed Insolvency Practitioners are highly experienced in providing the specialist advice needed to select the most appropriate and efficient closure procedure for any IR35 Company. Our expert guidance can also help prevent further issues arising in the future, such as an HMRC tax investigation or an Insolvency Service investigation.
If you are considering closing your contractor limited company as a result of issues caused by IR35, the sooner we talk, the better. We will talk you through all the options available, so that you know exactly where you are, helping you to make the best possible decisions. The first discussion is free.
In the meantime, if you need our help and advice in any of our specialist insolvency areas, please call our Bournemouth office, below, for a FREE initial discussion on the phone or over a coffee.
- Bournemouth: 01202 923009 or email elaine@antonybatty.comIR35 Changes. Do you need to close your company as a result?
What are the options for closing IR35 contractor limited companies?
IR35, also known as the Intermediaries Legislation, is a complex set of HMRC rules that are used to determine whether a contractor should be treated as an employee or self-employed for tax purposes. IR35 came into force in April 2000, and has had a number of changes since, with the most recent significant reform coming in April 2021. This reform has had an adverse impact on many contractor companies, with some directors looking to find the most efficient way to close their company down.
Elaine Wilkins, at our Bournemouth office reports that:
“We have had a number of enquiries from directors of contractor companies in recent months about their best course of action following the recent IR35 reforms. There is certainly some confusion around IR35 and directors are looking for clarity.”
In this article, we briefly look at what the reforms are and why it is having an adverse effect on some contractor companies, before looking at the most efficient ways to close down a contractor company – either solvent or insolvent.
The April 2021 IR35 Reforms and why they are important
Prior to April 2021, contractors were typically responsible for determining their own employment status. Under the new rules, this responsibility passed to the end-client. Public sector end-clients had been required to do this since 2017, and the 2021 reforms meant that medium and large sized private sector end-clients now had to do the same.
On the face of it, this might not seem a big change. However, quite apart from it being a complex and time-consuming process to determine whether a contractor falls inside or outside IR35, the implications for contractor companies and the end-clients are significant, for two main reasons: - Is the contractor considered to be inside IR35? If yes, then it is likely that the contractor’s income will be significantly reduced as they will become liable for income tax and National Insurance on their remuneration from their end-client as if they were employees.
- What about end-clients? For end-clients, which might be the hiring client or an agency, they become liable to pay the contractor’s employment taxes, which could have a material financial impact, as well as leading to fewer arrangements with contractors.
- The potential outcome for contractor businesses is that the changes mean it is no longer viable for directors to operate their businesses in the long-term and that closing down the business becomes an option.
If the business is solvent, there are two options for closing it down, with the choice depending on the level of retained profits.
Closing a solvent IR35 limited company – Company Dissolution or Members Voluntary Liquidation. - Voluntary Company Dissolution. Sometimes known as striking off, this option is an informal way of closing down a company that is no longer required when retained profits are less than £25,000. It can be a quick and simple process, but directors need to: inform HMRC of their intention to close; file their company accounts; close the business’s bank account; transfer any assets out of the business’s ownership and inform all the business’s creditors.
-
If using this method, the business must be solvent and able to pay all its creditors. If not, an Insolvency Service investigation might take place, with possible outcomes being insolvency claims against the directors personally and/or director disqualification. For this reason, it is sensible to consider taking advice from an Insolvency Practitioner before dissolving a company.
- Members’ Voluntary Liquidation (MVL). This option is for when retained profits are greater than £25,000 and requires the appointment of a Licensed Insolvency Practitioner. As with company dissolution, this option is only available for solvent companies that are able to pay all their creditors in full (plus any interest) within 12 months of closure.
- With MVLs, there is also the possibility that, under current legislation, the tax liability might be reduced to 10% with eligibility for Business Asset Disposal Relief (BADR – formerly known as Entrepreneurs’ Relief). Currently BADR has a lifetime limit of £1m per person and is available to those disposing of the shares of a trading or holding company or group in which they have held at least 5% of the voting rights for at least two years. Eligibility for BADR makes an MVL a particularly tax efficient process.
Closing down an insolvent IR35 limited company
If, however, the company is insolvent, it must be closed down using a Creditors’ Voluntary Liquidation (CVL). As with an MVL, a Licensed Insolvency Practitioner must be appointed in order to realise the business’s assets and distribute the remaining funds to creditors.
It is also worth knowing that company directors might be able to claim redundancy pay if the company enters a Creditors’ Voluntary Liquidation.
Take a look at our CVL infographic for a quick summary of the steps involved.
Talk to us about closing down your IR35 contractor company
IR35 rules that affect contractor companies, particularly post the April 2021 reforms, are complex and have already meant closure for many companies. Our experiences show that we know that many more are considering closing as a result.
Our Licensed Insolvency Practitioners are highly experienced in providing the specialist advice needed to select the most appropriate and efficient closure procedure for any IR35 Company. Our expert guidance can also help prevent further issues arising in the future, such as an HMRC tax investigation or an Insolvency Service investigation.
If you are considering closing your contractor limited company as a result of issues caused by IR35, the sooner we talk, the better. We will talk you through all the options available, so that you know exactly where you are, helping you to make the best possible decisions. The first discussion is free.
In the meantime, if you need our help and advice in any of our specialist insolvency areas, please call our Bournemouth office, below, for a FREE initial discussion on the phone or over a coffee. - Bournemouth: 01202 923009 or email elaine@antonybatty.com