Due to the changes that are due to come into effect in April 2020 many limited company contractors may choose to close down their limited companies and look into alternative ways of operating.
What is IR35, and when do the changes come into effect?
The IR35 regulations were first introduced in 2000 and were designed to reduce tax avoidance by contractors who HMRC perceived to be “disguised employees”. The IR35 rules were designed to ensure that contactors working via their limited companies – who are doing the same work as employees – pay broadly the same amount of tax.
The assessment process remains the same, but from April 2020 public authorities and medium and large sized companies who work with contractors will be responsible for deciding the employment status of these contractors. The public authority or medium and large company will need to determine the status, and then inform each contractor on their decision based on the online CEST (Check Employment Status for Taxtool)
If the contractors are deemed to be workers, and therefore classed as employees, they may decide the best plan of action is to close their limited company.
Currently this amendment to the IR35 regulations does not affect “small organisations” but this is due to change in April 2021.
How to close down a Contractors Limited Company?
If the limited company has surplus assets in excess of £25,000, the Contractor, as the shareholder of his Limited entity may wish to close his company in a structured and tax efficient way via a Members’ Voluntary Liquidation (MVL) as only liquidators can distribute surplus assets as a capital distribution.
Tax paid by shareholders on capital distributions by liquidators will be much less than outside of an MVL, whereby distributions are treated as income. In some case Entrepreneurs’ relief rate of 10% will apply saving many more thousands of pounds for the contractor.
Contractors should sit down with their accountant to calculate the tax saving that an MVL could bring, and if one is desired, contact us at Bailey Ahmad Business Recovery, as we have implemented over 200 MVLs, returning tens of millions to shareholders.
If you, or your clients wish to discuss this option, and find out more please contact us.