The IR35 reform is a change to the UK tax legislation that affects the way in which contractors and freelancers are taxed. The reform requires that contractors who work through their own limited company, also known as a personal service company (PSC), pay taxes in a similar way to employees if they would have been considered an employee if they had been directly hired by the client.
The reform has been controversial and has faced criticism from contractors and freelancers who argue that it unfairly targets them and imposes additional administrative burdens.
If a company is considering closing due to the IR35 reform, there are a few steps that should be taken. First, the company should review its contracts and determine whether it is likely to be affected by the reform.
If the company is likely to be affected, it should consider the financial implications and assess whether it is feasible to continue operating. If the company decides to close, it should inform its clients and any affected contractors, and take steps to wind up the business in an orderly manner. This may include informing HM Revenue and Customs (HMRC) of the closure, paying any outstanding taxes or debts, and transferring any assets to new owners or disposing of them. It is important to seek professional advice when closing a company due to the IR35 reform or any other reason, as there are specific legal and financial considerations that need to be taken into account.
Are You Clear on Your IR35 Status?
The rules surrounding IR35 have undergone significant changes in recent years, with the most significant change occurring in April 2021. Previously, it was the responsibility of the contractor to determine their own IR35 status and pay the appropriate taxes. However, under the new rules, the responsibility for determining IR35 status has shifted to the client or end-user.
Under the new rules, clients are required to assess the IR35 status of contractors and provide them with a determination. If the client determines that the contractor is inside IR35, they must deduct tax and NICs from the contractor’s pay at the appropriate rate. If the contractor disagrees with the determination, they can challenge it and provide evidence to support their case.
The new rules have sparked significant controversy and have been met with opposition from both contractors and clients, with many arguing that the changes will result in an administrative burden for both parties and could lead to a reduction in the number of contractors available for hire. It remains to be seen how the new rules will ultimately impact the contracting industry.
What Does IR35 Mean for Contractors?
IR35, also known as the Intermediaries Legislation, is a set of rules that determine whether a contractor should be treated as an employee or a self-employed individual for tax purposes. It is designed to ensure that contractors who work like employees, but who have chosen to structure their work as a business, pay the same taxes as employees.
For contractors, IR35 can have a significant impact on their income and tax liabilities. If a contractor is deemed to be inside IR35, they will be required to pay tax and National Insurance contributions (NICs) at the same rate as an employee. This can result in a significant reduction in their take-home pay, as they will no longer be able to claim certain tax deductions and exemptions that are available to self-employed individuals.
Contractors who are deemed to be outside IR35, on the other hand, will continue to be treated as self-employed and will be able to claim tax deductions and exemptions as normal.
It is important for contractors to carefully consider their IR35 status and seek professional advice if necessary, as non-compliance with IR35 can result in significant financial penalties.
Who is Liable?
Whether or not IR35 affects you as a contractor depends on your working arrangements and whether you would be considered an employee if you were not invoicing through a company. Under IR35, contractors are considered to be inside the scope of the legislation if they would be considered employees if they were not working through a company.
In other words, if you have a close working relationship with your client, work set hours, and are provided with equipment and support by your client, you may be considered an employee for tax purposes, even if you are invoicing through a company.
On the other hand, if you are truly self-employed and work on a project-by-project basis, setting your own hours and providing your own equipment, you may be considered outside the scope of IR35.
Closing Down a IR35 Company
Closing down a company that is out of I35 can be a complex process, especially if you have ongoing contracts or have not kept up-to-date with your tax and compliance obligations. Here are some steps to consider when closing down a PSC:
- Cancel any contracts or engagements you have with clients. It is important to ensure that you have fulfilled all your obligations under these contracts before you close your company.
- Notify HM Revenue and Customs (HMRC) that you are closing your business. This can be done through the HMRC online services portal or by contacting the HMRC tax office that deals with your limited company.
- File any outstanding tax returns and pay any outstanding tax liabilities. It is important to ensure that you have paid all the tax you owe before you close.
- Consider whether you need to inform any other government agencies or regulatory bodies, such as Companies House, about the closure.
- Cancel any business insurance policies you have in place.
- Close any business bank accounts and transfer any remaining funds to a personal account.
- Consider whether you need to inform your clients, suppliers, or other business contacts about the closure.
- Consider whether you need to sell or dispose of any business assets, such as equipment or vehicles.
- Finally, once all the necessary steps have been completed, you can submit a request to have your limited company struck off the Companies House register.
Closing Your IR35 business with a Members Voluntary Liquidation
One way to close your IR35 business is through a process called Members Voluntary Liquidation (MVL). This is a formal process in which an appointed liquidator dissolves the structure and distributes any remaining assets to the shareholders.
To initiate an MVL, you must first pass a resolution to wind up the entity and appoint a liquidator. The liquidator will then take control of the PSC’s assets and liabilities and begin the process of realizing and distributing these assets to the shareholders. This process may involve selling any assets, such as equipment or property, and paying off any outstanding debts or liabilities.
Once the liquidation process is complete, the ltd co will be dissolved and removed from the Companies House register.
MVL is typically used when a there is no outstanding debts and the shareholders want to close the company in an orderly and tax-efficient manner. However, it is important to seek professional advice before initiating an MVL, as the process can be complex and there may be tax implications for the shareholders.
Benefits
If you believe the changes to IR35 legislation render your limited company no longer necessary, there are many benefits to closing it down via solvent liquidation. Here are just a few:
- It’s a statutory procedure that’s undertaken by a licensed insolvency practitioner
- An orderly business closure is effected
- The company cannot be reinstated at a later date
- It’s a tax efficient process
It’s important to note, however, that closing down your limited company doesn’t protect you from tax investigations by HMRC backdated to when you were trading. Reassuringly, HMRC has stated that in relation to IR35 tax investigations, they don’t intend to use new information arising from the changes to launch investigations into tax years prior to the reform start date unless they suspect fraud, but nothing is certain in this regard.
Officially, HMRC has 12 months to investigate a company from the date it filed its final tax return, but a timescale of six years exists for them to investigate your personal tax affairs. Furthermore, this can be extended to 20 years if they do suspect fraud.
Read more: IR35 reversal scrapped
Should you liquidate your company prior to the IR35 reforms?
Carrying out a contractor company liquidation and closing down your limited company before the IR35 rules come into effect in 2021 may be advisable, but this largely depends on your individual circumstances and working practices.
If in the past your status has been determined as inside IR35, there may be no problem. If on the other hand recent contracts have been fulfilled outside of IR35 rules, and an end-client determines the opposite, HMRC may flag the situation for further checks.
We provide unbiased independent advice on how IR35 reforms could affect your tax position, we will offer an honest view if it is worthwhile liquidating your company prior to April 2021.
To have a free consultation simply complete the online enquiry form to get started.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.