Updated: 29th November 2020
The changes to IR35 rules have been delayed for a year due to the coronavirus outbreak, giving you valuable extra time to consider your position in relation to current contracts and those completed during the past few years.
But if you need to take action to protect your tax position, what are your options and is IR35 company liquidation advisable?
Reforms to IR35 legislation were due to take effect from April 2020, but have now been postponed until April 2021 due to the COVID-19 pandemic. The devastating effect of the crisis on the economy has led to government emergency action to help businesses and the self-employed survive, and this delay is one such measure.
When they come into force, the IR35 changes involve the transfer of decision-making on a contractor’s employment status to the end-client where large and medium sized private sector clients are concerned. The changes do not apply to small private sector businesses, and public sector clients already hold this responsibility.
A status disagreement process will exist if you dispute client determinations, but the issue of HMRC tax investigations remains. Investigations could potentially be backdated for six years, so should you liquidate your company before the reforms take effect.
To establish whether liquidating your company prior to the IR35 reforms is a good idea, you’ll need to obtain independent advice. Unbiased professional guidance will clarify your likelihood of being investigated by HMRC based on previous and existing contracts, and your current working practices.
When the reforms take place, HMRC’s updated CEST tool – Check Employment Status for Tax – will be used by end-clients, but unfortunately the world of contracting is not straightforward and the tool may not cover particularly convoluted working arrangements. Independent advisers can assess your situation and advise whether liquidation may be a good option.
An IR35 Members’ Voluntary Liquidation (MVL) is a formal process that must be undertaken by a licensed insolvency practitioner (IP). It’s available for solvent businesses including contractor companies/personal service companies, and is typically beneficial from a tax perspective for companies with more than £25k in retained profits.
During an MVL all creditors of your company are identified and paid off from the sale of business assets. Any remaining cash or assets are then distributed to the shareholder(s).
This is a tax-efficient process as the funds are treated as capital, and if eligible you may be able to lower your tax liability further by claiming Entrepreneurs’ Relief, which offers a rate of 10% tax.
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 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.
If you want to continue trading using the limited company structure but remain concerned about potential investigation by HMRC, it may be worthwhile taking out IR35 insurance. This would help you find legal support in the event of a tax investigation and can provide some financial peace of mind.
IR35 insurance policies typically cover the costs of legal representation during an investigation as well as the tax liability that arises should you be found to have worked ‘inside IR35.’
Liquidating 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.
Real Business Rescue can provide unbiased independent advice on how IR35 reforms could affect your tax position, and whether it may be worthwhile liquidating your company prior to April 2021. Please call one of our partner-led team – we operate across the UK, and offer free same-day consultations.