Can an umbrella company shelter you from HMRC?
They might want to pursue other ambitions or they might have accepted a job with somebody else and need to close their business to allow it. Some might want to make use of the tax advantages that come from liquidating their company and taking the profits as a capital payment rather than a dividend.
Whatever the reason – it’s a simple enough process and just requires appointing a licensed firm like ours, and completing the requisite forms. But life happens and sometimes people need to start working again to bring in some extra money or because they might want to take on a short-term challenge or project.
This is where they might have a sticky tax problem called TAAR.
TAAR or the Targeted Anti-Avoidance Rule was introduced in The Finance Act 2016 as a means to combat tax avoidance and phoenixing.
We’ve written about the practice of phoenixing before – it’s where a company allows itself to be run down deliberately so it can relaunch with a slightly different name and no debts or it could be a vehicle to allow previously banned and disqualified directors to illegally run their companies again.
So what does this have to do with someone who’s closed their company with an MVL and just wants to work again?
A lot – if HMRC suspect that somebody has liquidated their company specifically for tax purposes and then reformed relatively quickly or straight away then they will be taking a close interest in what they think would be an attempt to skirt the system.
TAAR is a self-assessed process with no clearance procedure involved. The onus is on the taxpayer to reach a conclusion around their submittance about whether it applies to any distribution of funds relating to their company being wound up.
In order to determine whether a transaction would come under the jurisdiction of TAAR, HMRC look at four conditions:
- The applicant has a stake of at least 5% in the company being liquidated
- That the company is “close” – it is privately owned and controlled by five or less individuals
- The individual receiving the distribution continues to carry on, or be involved with, the same or similar trade or activity as that of the distributing company at any time within two years of the distribution.
- That the main or only purpose of the liquidation was to reduce or avoid paying due income tax
If all of these conditions are met, then there’s a decent chance that HMRC would investigate. The third condition will often be the largest focus of any investigation for contracts closing their company due to the IR35 changes.
Umbrella may provide shelter (unless there is a hole)
Those looking at post IR35 changes generally have two options, go onto the payroll or join an umbrella company. An umbrella company effectively acts as an employer for contractors who are working on fixed/short-term contracts.
They collect earnings from the client company, deduct the necessary tax, NICs and their fee before paying the remaining amount to the contractor. It’s similar to being a full-time employee but without the accounting and tax responsibilities.
Some contractors may be eligible to claim some associated business costs such as travel and other expenses and some umbrella companies will factor this in in advance and pay more at the outset. The onus on this is on the individual taxpayer so they should find out the arrangements at the start of their contract.
For now, umbrella companies appear to be holding up against the TAAR, however they are not strictly outside the scope of the criteria and the examples set by HMRC. Whilst the risk of this happening is low under an umbrella company, there remains a risk that HMRC could decide to turn your umbrella inside out, if the government pushes them to do so.
The safest way to protect your distribution from the MVL moving forward would be to move onto the payroll of the company. This also appears to be the main practice being adopted to mitigate against future potential IR35 risks, the next obvious step in IR35 is the targeting of umbrella companies.
A Members Voluntary Liquidation (MVL) remains one of the most efficient ways of closing a solvent company but like almost every other method, it still requires expert oversight and advice.
Get in touch with us if your personal circumstances are changing and you think it’s time to make a change.
We can help you prepare everything required to have an orderly closure and help you realise your assets quicker.