On 6th April 2021, the government’s reformations to off-payroll working rules (IR35) came into effect. We look at how this could impact limited company closure options.
On 6th April 2021, the government’s reformations to off-payroll working rules (IR35) came into effect, with the impact of these changes proving great enough that contractors are having to consider whether or not they should cease trading or even close down their business altogether.
Why have the IR35 rules been changed?
The changes to off-payroll working rules come as a measure for HMRC to clamp down on disguised employment in order to avoid undue tax losses. Disguised employment refers to when a contractual worker who fills a permanent role within a business is treated as though they are an employee of the end client, meaning that that they do not pay the Income Tax and National Insurance contributions that a permanent worker would. The structure of limited companies allows contractor directors to receive remuneration via dividends as well as a minimal wage, which creates a lower tax liability compared with employees, who have to pay Income Tax on their full salary.
What changes have been made to IR35 rules and how might they affect me?
Now that the changes to IR35 are active, public sector clients and medium or large-sized clients outside the public sector are responsible for deciding the employment status of a business’ worker, and said worker’s fees will be subject to Income Tax and National Insurance contributions if IR35 rules apply, bringing off-payroll regulations in line with public sector clients.
What should I consider when closing my business because of these IR35 changes?
If the increased tax liability caused by the amendments to IR35 rules is such that closing your business seems like the best course of action, it’s important to consider the following options and which is best suited to your specific circumstances:
- Members’ Voluntary Liquidation – If your business is solvent, but you still wish to close it due to the effect that the changes to IR35 rules will have on its future, then a Members’ Voluntary Liquidation (MVL) is perhaps the most suitable procedure for your situation. The point of an MVL is to close down a solvent company in as cost-effective way as possible, extracting the remaining value of the business for its directors and shareholders. It also allows you to claim Asset Disposal Relief, which unlocks a tax-effective way of winding up your company’s affairs by enabling you to pay an effective rate of 10% tax on distributions from the business.
- Voluntary dissolution – Another option for solvent companies is voluntary dissolution, in which the business’ director applies to Companies House in order to have their company dissolved and struck off the register of companies.
- Creditors’ Voluntary Liquidation – If your business has become insolvent because of the IR35 changes, however, then you should look to shut down via a Creditors’ Voluntary Liquidation (CVL), in which your company’s assets are sold in order to repay creditors as high a return as possible, whilst any remaining debts are written off. Through this method, it is also possible to claim director redundancy – which averages at around £9,000 a claim – if you are classified as an employee of the company as well as its director, having worked under a contract of employment.
If you want to know more about shutting down your business, whilst making sure to fulfil all of your legal obligations to avoid the risk of being held personally liable for additional financial losses by your creditors if your company is insolvent, then maintain your peace of mind throughout the process by contacting Voscap at 020 7769 6831 or email team@voscap.co.uk to speak to one of our business recovery specialists.
