Faced with being deemed employees from 1 April 2021, many contractors in various industries will have to make a decision whether or not to wind up their personal service company (“PSC”).
Many will accept direct employment offers from their engager which may be limited in the current climate. Others will be forced into an umbrella structure bearing the burden of Employer’s and Employee’s NIC costs.
Some will have reasons and means to mount a justifiable appeal against an unfavourable Status Determination Statement and hope that the engager reconsiders their decision in light of such an appeal. In other circumstances, if there is potential for ad hoc contracts on a self-employed basis, it may be feasible to continue the operation of the company and run it alongside employment.
In any event there will be thousands of companies wound up between now and 1 April 2021, but what form will this take and how can the one-man band minimise the liquidation costs and tax charge of doing so?
A members’ voluntary liquidation is a process used to voluntarily wind up a solvent company and distribute its reserves to shareholders in a tax efficient and advantageous way. The IR35 changes will prompt such a process for many one-man companies. Unfortunately for companies with assets of more than £25,000, this can only be done via the appointment of a liquidator, often incurring unnecessary and unaffordable fees.
If the PSC can reduce its asset value to below £25,000 by making distributions to shareholders via dividends, it can then apply to Companies House and HMRC to informally wind up the company. Not only will this save on liquidators’ fees but also benefit from more favourable capital gains tax treatment. The shareholder can then use their capital gains tax annual exemption to reduce the chargeable gain.
By applying for an informal liquidation, the company must contact Companies House using form DS01. It must also ensure that banks and other creditors are aware of the process and that all PAYE, VAT and Corporation Tax payments are up to date. Final Accounts to cessation of trading should be filed with HMRC so that there are no objections to the winding up. A final VAT Corporation Tax Return should be filed and VAT registration cancelled.
If, as intended, and after the payment of a final dividend before the liquidation process, the reserves are below £25,000, it should be reasonable to apply capital gains tax treatment to the final distribution, thus availing of at least one capital gains annual exemption and a 10% entrepreneurs relief capital gains tax rate on the remainder.
Private Sector IR35 reform is upon us and where it seems inevitable that companies will be wound up, plans should be put in place for a solvent and smooth liquidation.
Our advice to contractors who are in this position is to liaise with your advisors and ensure the process is as tax efficient and pain free as possible.
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This article was originally published on the accountingWEB Insight Exchange on 2nd December 2020.