On 6 April 2020 the new ‘Off-Payroll’ rules will come into force for the private sector and will mirror the public sector arrangement for assessing whether IR35 applies. Contractors working for medium to large clients in the private sector will no longer be responsible for determining whether IR35 applies as this will now rest with the client.
Because of these reforms, a contractor could be employed by the client and their personal service company may no longer be required. If a personal service company has retained earnings and assets, a Members’ Voluntary Liquidation could be a tax efficient way for shareholders to extract funds and assets.
What is IR35?
IR35 came into force in April 2000 and was introduced to tackle perceived tax avoidance by workers who supply their services to organisations through an intermediary, such as a personal service company. It is designed to assess whether a contractor is a genuine contractor or an employee.
If the contractor is deemed an employee, also known as ‘inside IR35’, the intermediary is liable to account for Income Tax and National Insurance Contributions (“NIC”) of the worker.
Under the current private sector rules, the intermediary (usually the contractor’s personal service company) is required to self-assess whether IR35 applies. In HMRC’s view, this has led to poor compliance and the application of the rules largely ineffective. The legislation was criticised for failing to deal with worker’s rights and lost revenue to HM Revenue & Customs.
What are the ‘Off-Payroll’ Reforms?
In April 2017 the UK Government announced the ‘Off-Payroll’ reforms. These rules will apply if a worker provides their services through an intermediary. The rules make sure that workers pay broadly the same tax and NIC as those who are directly employed. The new rules were initially introduced only for workers providing services to public-sector bodies.
On 6 April 2020 the new ‘Off-Payroll’ rules will come into force for the private sector as well. If a contract is ‘caught by IR35’, a worker is deemed an employee and the intermediary will be liable for Income Tax and NIC of the worker.
These reforms will have significant implications for contractors and the clients that hire them. Clients therefore face a decision – retain a contractor and run the risk of HM Revenue & Customs determining that the contract is ‘inside IR35’, take on the worker as an employee or potentially restructure internally and make the current role redundant.
Employees, Contractors & IR35
Employees are treated differently to contractors, with an employee position qualifying for a workplace pension, holiday pay, potentially sick pay, redundancy rights, and the employer having to pay employer’s NIC.
In comparison, a contractor receives an agreed rate and works for a fixed term with no employee benefits. If caught by IR35, also known as ‘inside IR35’, the personal service company is liable for Income Tax and NIC of the worker.
This intermediary structure is attractive to the end user (the client) as it gives flexibility and an ability to control costs where demand for labour varies. There is no employer’s NIC and no need to offer employment rights or benefits.
What is a personal service company?
A personal service company, also known as an ‘intermediary’, is a limited liability company which a contractor uses to service a client. Often an ‘employment’ agency will also sit in between the end client and the worker, which is also an intermediary under the IR35 rules.
The contractor works via the personal service company and it invoices the agency or the client for its services. Generally a personal service company has the same director and shareholder (but not always). The director will often receive a salary equal to his personal allowance and then remaining funds extracted via a dividend to shareholders.
What is a PAYE umbrella company?
An alternative to using a personal service company is to be an employee of a PAYE umbrella company. Broadly, the arrangement is that the contract is between the client and the PAYE umbrella company. The PAYE umbrella company invoices the client and pays the worker a PAYE salary.
Before determining which payment scheme to use, a worker will need to establish if the contract is ‘inside’ or ‘outside’ of IR35.
What is the position for small clients?
Where the end user (client) is a small company, the responsibility for assessing whether a contract is caught by IR35 will remain with the contractor.
If HM Revenue & Customs consider that the contract is caught by IR35, not only will the personal service company be liable for Income Tax and NIC of the worker, but HM Revenue & Customs could go back as far as six years and assess additional liabilities.
In view of the potential liabilities, it is essential that contractors review each contract and where appropriate obtain professional advice.
What happens if I take a new role and no longer require my personal service company?
If you are unsure whether there is any benefit in keeping your personal service company, you could decide to mark it as dormant. The company remains active and will need to maintain its compliance obligations. The company will have a recurring expense, but this would be less due to the simple nature of the tax returns and statutory accounts. Sometimes this option is attractive if the shareholder is planning to extract dividends over successive tax years.
If the company is no longer required and it is solvent, there are two routes available which would formally close down the company and result in the company’s dissolution:
- Company application for striking-off;
- Members’ Voluntary Liquidation (“MVL”).
The most appropriate route will depend on the company’s financial position.
Generally, this depends on whether the company has net assets in excess of £25,000. If it does, then an MVL may be more advantageous to shareholders due to Capital Gains Tax (“CGT”) treatment on a Liquidator’s capital distributions. However, advice and planning would still be required to ensure this is done in the most efficient manner.
Company application for striking-off
If appropriate and the company is eligible, the directors can apply for a company to be struck-off. Provided there are no objections from creditors, Companies House will dissolve a company three months after the application is made. This process can be simple and cost effective. It does, however, place additional risk and liabilities on the directors should the company not meet the qualifying conditions prescribed by the Companies Act 2006.
See further information regarding a company’s application for striking-off.
Members’ Voluntary Liquidation
If an MVL is the appropriate procedure, a Liquidator will be appointed by shareholders to wind-up the company’s affairs. Once completed and a final account is filed with Companies House, the company is dissolved two months later. This is provided there are no objections. Compared to a company application for striking-off, this process is more costly and can take between six to twelve months to complete. However, in most cases, tax savings to shareholders far outweigh the cost of the MVL.
Benefits of an MVL are:
- Shareholders get quick access to funds and assets;
- Tax efficient distributions to shareholders (CGT treatment);
- Distributions can be in cash and/or assets in specie;
- A cost effective legal process to bring the company’s affairs to an orderly conclusion;
- An independent licensed Insolvency Practitioner is appointed to complete the process for you;
- Companies House commence the dissolution process once the liquidation ends.
See further information regarding a Members’ Voluntary Liquidation.
What are the tax implications of closing a limited company?
For shareholders this will depend on the company’s solvency and their personal tax position.
Where a company is solvent, shareholders will be receiving a return on their investment which will be subject to CGT as a Liquidator’s distribution is capital and not income. Tax planning for both the company and shareholders is therefore an important step in planning for an MVL.
How much does it cost to close down a limited company?
If the directors are applying for the company to be struck off, Companies House charge a fee of £10.
MVLs can start from £1,000 plus disbursements plus VAT.
The concerns and uncertainty around the implementation of the ‘Off-Payroll’ reforms have been well reported on in the news. It has now become a political matter with the Liberal Democrats pledging to review them should they be elected.
We have already seen some major banks confirm that they will no longer engage contractors who provide their services via a personal service company. In some cases, contractors are being offered employee positions, effectively rendering their personal service company redundant.
If the company is no longer required and has retained earnings and assets, then a Members’ Voluntary Liquidation could be a tax efficient procedure for shareholders to extract cash and assets.
Request Professional Advice
Obtaining professional advice is key and only a licensed Insolvency Practitioner may act as Liquidator of a company. Approved Recovery offer a free initial consultation to discuss your situation and options, and help you determine the best way forward.
Approved Recovery specialises in providing Members’ Voluntary Liquidations to small companies nationwide. We service trading, contractor, consultant and dormant companies. We also have experience in dealing with special purpose vehicles and corporate group simplification.
Our Solvent Solutions Simple MVL service is perfect for personal service companies, with fees starting from £1,000 plus disbursements plus VAT.