Members Voluntary Liquidations for Contractors
Are you a contractor with a Personal Service Company (PSC)? Does the IR35 Reform affect you?
If so, it may prove advantageous to change your employment status and liquidate your company using an MVL.
The IR35 off-payroll reforms came into force in the public sector in April 2017, and the Government announced in the Budget 2018 that they would extend the IR35 reforms to the private sector in April 2020. However due to COVID-19 the private sector IR35 reforms have been delayed until April 2021.
IR35 affects all contractors who do not meet HMRC’s definition of self-employment. The IR35 legislation is designed to stop contractors working as ‘disguised employees’, ensuring they pay the same Tax and National Insurance contributions as an equivalent employee.
There are increased risks and responsibility that come with contracting, including a lack of employee benefits, which is why contractors benefit from tax advantages.
The changes, when finally introduced, will shift the responsibility for making IR35 status assessments from the intermediary providing the worker (i.e. the limited company) to the agency or the end client who pays the limited company.
If you are deemed to be working as a contractor without accepting the increased responsibilities, you will not be entitled to the tax advantages.
Options for PSCs
The government’s reform of IR35 rules is forcing many contractors operating Personal Service Companies to review their options.
Choices are:
- Go permanent – PAYE
- Use an umbrella company
- Show that you are ‘self-employed’
Closing down your PSC
If, ultimately, you are left with a PSC that has no useful purpose, you will need to consider how to close down your company and extract your cash in a tax-efficient manner. This is where a Members Voluntary Liquidation (MVL) may be helpful.
An MVL is a formal process for closing down a solvent company in a cost-effective way, where a company with net assets over £25,000 is put into liquidation.
There are often substantial tax advantages in conducting an MVL as the monies that will be distributed to shareholders represent a return of capital, on which capital gains tax is payable by the shareholder.
Tax advantages of an MVL
Distributions declared by a liquidator are taxed as a capital distribution, which is tax on the capital gain, (this is the gain in the value of the shares compared with the amount which the shareholder initially paid for them). For example, if a shareholder were to receive a distribution of £1,000 on a share which they purchased for £1, that would represent a notional capital gain of £999.
The primary advantage for contractors is that, if the circumstances are correct, monies received as a capital distribution may qualify for Entrepreneurs’ Relief. Entrepreneurs’ Relief is a tax benefit for individuals who have invested in companies, allowing them to pay a tax rate of 10% on qualifying disposals. It is claimed as part of a personal tax submission for the period in which a capital distribution is received, and the following criteria must apply:
- The shareholder must own at least 5% of the shares;
- They must have been owned for at least one year prior to disposal (in this case liquidation);
- The assets must be distributed within three years of cessation.
Where Entrepreneurs’ Relief is not available, a UK individual will typically pay a rate of 20% on capital gains, so an MVL may still offer a substantial tax saving over taking dividend income.
You will require the services of an insolvency practitioner to assist with the liquidation of your company.
It is important to note that the liquidator acts for the company and will not be in a position to provide the director/shareholder with advice on their personal tax position.
Any specific queries regarding a director/shareholder’s personal tax position should be dealt with by a personal accountant or tax adviser.
How BBR can help
If you’re thinking of closing down your PSC in favour of a different employment status, please contact us – we offer free consultations to determine options open to you.