Personal Service Companies (PSCs) are a popular option among contractors, as they offer many benefits over traditional employment. PSCs are limited companies with a single director, who is also the contractor.
The ability to extract much of their income as dividends instead of a salary under the PAYE scheme is one of the biggest advantages of operating a PSC. This can result in a lower tax bill, as dividends are taxed differently than a salary.
PSCs must comply with IR35 legislation, which is designed to prevent tax avoidance by ensuring that individuals working through a personal service company are taxed as if they were employees.
The responsibility of determining a contractor’s employment status for tax purposes lies with the client, and failure to correctly apply IR35 can result in significant fines for both the client and the contractor. It is important for PSCs and their clients to understand and follow IR35 regulations to avoid any potential legal and financial implications
How to close a Personal Service Company
Closing a Personal Service Company (PSC) is a process that must be followed in order to dissolve the company legally. To close a PSC, the director must first ensure that all tax liabilities have been settled, including Corporation Tax and VAT. The company’s accounts must also be up-to-date and filed with Companies House.
Once these obligations have been met, the director can apply to strike off the company by filing a form with Companies House. If there are no objections, the company will be dissolved, and the director will no longer be responsible for its financial obligations.
It’s important to note that striking off a company is a legal process and can have implications for the director’s future financial and employment prospects, so it’s advisable to seek professional advice before proceeding with the closure of a PSC.
Reasons why you would close a PSC
There could be several reasons why someone would wish to close a Personal Service Company (PSC).
Some common reasons include:
- Retirement or change in career: If the contractor has reached retirement age or has decided to change their career, they may wish to close their PSC.
- Lack of work: If the contractor has not secured enough work to sustain their PSC, they may choose to close the company.
- Ir35 legislation: If the contractor’s working arrangement is deemed as employment by the IR35 legislation, they may decide to close the PSC and work directly for the client.
- Simplification: If the contractor is tired of managing the administrative and financial responsibilities of running a PSC, they may choose to close it and return to traditional employment.
- Personal circumstances: Personal circumstances such as ill health, change in family circumstances or relocation may lead a contractor to close their PSC.
These are just some of the reasons why someone may wish to close a PSC. It’s important to understand the implications and legal requirements of closing a company before proceeding with the process.
Ways to shut down your Personal Service Company
There are a number of ways to shut down your PSC, these are mainly dependent on your situation, you can either dissolve the company at Companies House, or close the business by way of a liquidation process.
PSC closure options include:
Members voluntary liquidation
A Members Voluntary Liquidation (MVL) is a process of closing a solvent company, and can offer several advantages when closing a Personal Service Company (PSC). An MVL allows the directors to extract the remaining assets of the company in a tax-efficient manner, as any distribution to shareholders is treated as a return of capital, which is taxed differently than income. This can result in a lower tax bill for the contractor.
In addition, an MVL provides a clear and formal process for closing the company, ensuring that all obligations have been met, and provides a clear end to the company’s existence. This can also provide peace of mind for the contractor, as it demonstrates that the company has been closed in a responsible manner. An MVL can also help to maintain a positive reputation for the contractor, as it shows that they have acted in a professional manner in closing their PSC.
Company voluntary liquidation
A voluntary liquidation of a company is a process of closing an insolvent company, and can offer several advantages when closing a Personal Service Company (PSC). A CVL provides a formal process for winding up the company, which can help to resolve any outstanding debt or other obligations, and provide a clear end to the company’s existence. This can provide peace of mind for the contractor, as it demonstrates that the company has been closed in a responsible manner.
In addition, a CVL can also provide a way for the contractor to distance themselves from any financial difficulties the company may have encountered, as the liquidator takes over the responsibility of resolving any outstanding issues. This can help to maintain a positive reputation for the contractor, as it shows that they have acted in a professional manner in closing their PSC. A CVL can also offer protection for the contractor’s personal assets, as the liquidator is responsible for selling the company’s assets to repay any creditors.
Dissolution of company
A Dissolution of a company, also known as striking off, is a process of closing a dormant company and can offer several advantages when closing a Personal Service Company (PSC). Dissolving a company is a straightforward and cost-effective process, as it does not require the appointment of a liquidator. This can make it an attractive option for contractors who have a straightforward financial situation and have no outstanding obligations or liabilities.
Dissolving a company can also provide a clear end to the company’s existence, demonstrating that the contractor has taken steps to close their PSC in a responsible manner. It also reduces the administrative burden on the contractor, as they will no longer be responsible for filing annual returns or maintaining accurate financial records. Additionally, dissolving a company can help to maintain a positive reputation for the contractor, as it shows that they have acted in a professional manner in closing their PSC.
Benefits of closing your PSC
Using an insolvency practitioner when closing a Personal Service Company (PSC) can offer several benefits. An insolvency practitioner is a specialist in dealing with company closures and can provide expert advice on the most appropriate and tax-efficient method of closing a company. They can help contractors navigate the complex legal and financial requirements of winding up a company and ensure that all obligations are met.
Working with an insolvency practitioner can also provide peace of mind for the contractor, as they take on the responsibility of dealing with any creditors, settling any outstanding debts and ensuring that all legal requirements have been met. This can help to protect the contractor’s personal assets and maintain a positive reputation, as it shows that they have acted in a responsible manner in closing their PSC. An insolvency practitioner can also help to minimise the risk of any future legal action or disputes arising from the closure of the company.
Need help to shut down your company
If you need help deciding which is the best option for your Personal service company, simply make contact with us on the above number or complete an online enquiry form and one of the PSC team will return your call.
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.