Firstly the idea of being your own boss is a powerful one. It’s not for everyone to be sure, but if you ultimately like calling the shots for yourself then it makes sense to go ahead and do it.
Also some contractors work in industries where it is hard to find a regular company that would employ them so they have to form their own company in order to pursue their dream career and fill the niche they’ve successfully identified.
The second reason is that because contractors tend to be more entrepreneurial by nature, the inherent flexibility of their status is a great benefit.
Sadly, like all businesses, it can come with its own challenges including proving that they are actually independent contractors and not “disguised employees”.
This was the focus of Off-Payroll legislation aimed at making public sector recruiters responsible for assessing and vetting the true status of contractors working on their projects.
Brought in to help address tax avoidance, it has also caused a lot of worry and stress and ultimately led to many contractors to avoid working on public sector projects altogether to avoid uncertainty and doubt.
Sadly for them, the changes are due to be imposed on private sector employers too, so the dilemma will arise once again for contractors.
Many will have considered whether it’s worth all the hassle and expense of proving their employment independence and looking for a payroll job instead.
Covid-19 changed a lot of these calculations.
The IR35 or “Off-Payroll” legislation is due to be reinstated in April after being postponed for a year and many contractors who have been lucky enough to continue working and earning during the lockdown period will now find their roles and earnings coming under scrutiny in the near future.
The threat of IR35 might cause some to permanently look for the security of official PAYE employment or it might tempt others to bite the bullet and move forward with their retirement plans earlier than they would otherwise have wished.
Regardless of their personal circumstances, one final choice remains - what to do about their old company?
Optimistic contractors might want to keep their options open and hold onto the framework to provide them with a means of transitioning back into their previous independent existence when it’s feasible or economically advantageous.
But this could complicate their employment status if it’s queried by HMRC.
There would also be the legal duties of any company director even if they aren’t working for their own business at the moment. It might simply be easier to close their company down and reestablish one when material circumstances change.
So for any contractor facing this dilemma, there is an effective and efficient route that would allow them to tidy up any loose ends.
It could also be lucrative for them too.
We’re talking about a Members’ Voluntary Liquidation (MVL), the easiest and most straightforward way to close any solvent business - contracting or not.
Not every business will qualify for an MVL, however.
The business must be solvent, which means they must be able to reasonably pay their creditors in full within a 12 month period. They also need to have over £25,000 in assets and also have either stopped trading or be about to.
If all of these criteria are met then an MVL is definitely a strong option to consider.
If you act quickly you can also take advantage of Business Asset Disposal Relief (BADR).
BADR, as Entrepreneurs Relief was previously known until April 2020, is the rate of tax paid on the assets of your business as they are realised. It’s significantly lower than the equivalent rate of income tax that would be paid on any assets if they were released as a dividend.
A licensed insolvency practitioner who would oversee your MVL could allow assets to be disposed of as Capital instead, which is usually taxed at either 18% or 28%, but qualifying assets under BADR are taxed at 10% - potentially representing tremendous savings.
Another reason to act quickly to close your company is that there’s a lot of speculation that the Chancellor will be looking to change the rules on BADR in the forthcoming Budget in March making it more difficult to take advantage of - or potentially eliminating it altogether.
So if you’ve been thinking about closing your contracting business - now is the perfect time to pull the trigger and do it.
We’ll arrange a convenient free virtual consultation for you with one of our expert advisors to discuss what you want to do.
Then we can work on a plan together to get there and let you get on with your next employment adventure.
Copyright: Simon Walker HM Treasury
The Labour Party has also pledged to crack down on what they call a “rigged system” and specifically stated that they will abolish entrepreneurs relief.
This was left to Sir Edward Troup, former head of HMRC, who suggested that the scheme should be scrapped as it was costing the country over £2bn a year in lost tax revenue.
His intervention followed an IFS report that revealed more than 9,000 people collected over £1m in capital gains tax in the last financial year paying £5.1bn tax on £33.7bn of capital gains tax (CGT) income as a result.
This worked out as an average tax rate of 14.8%, which is lower than the basic income tax rate of 20%.
Sir Edward said: “This inequity would be almost entirely eliminated by the abolition of entrepreneur’s relief. It gives £2bn CGT savings every year to those who have already made their gains and provides no incentive for real entrepreneurship.”
“The point of entrepreneurs’ relief is that it rewards you when you make a lot of money. There are lots of things getting in the way of people becoming great entrepreneurs in this country, but the fear of tax on future gains is not one of them.”
“There’s a very strong case for whichever party wins the election to ramp down entrepreneurs’ relief immediately.”
Entrepreneurs’ Relief is used to pay less capital gains tax when people sell (or dispose of) part of or all of their business. Used appropriately, they will pay tax at 10% on all gains on qualifying assets which is less than if the money was claimed as a salary.
In order to qualify for entrepreneurs’ relief, the recipient must be a shareholder in a close company and have owned it (or part of it) for at least two years before it’s sold. This also applies if the business is being closed but assets must be disposed of within three years in order to qualify for relief.
First introduced by then Chancellor Gordon Brown in 2008, it was limited to £1m per person but the cap has increased several times and was raised to £10m in 2011 by the coalition government.
HMRC tightened its rules in 2016 to narrow the circumstances under which entrepreneurs’ relief could be claimed in a members voluntary liquidation scenario.
April 2020 already looks like it’s going to be a significant month of financial changes as new IR35 legislation takes effect and HMRC due to regain its preferential creditor status.
Changes to entrepreneurs relief or other business taxes will only add to a dynamically altered landscape.
Entrepreneurs relief is already a complicated device that should only be navigated by skilled financial or liquidation experts.
Many businesses looking to close or liquidate in an orderly fashion have faced unexpected hurdles in their attempts to claim ER because of the various derogations and complications that exist.
The easiest thing to do would be to contact us and arrange a free initial consultation with one of our qualified expert advisors.
We’ll be able to properly advise you on what you’re entitled to claim for and other benefits you might be able to realise from your company in the most efficient and effective ways to access them.
Whilst both the Members Voluntary Liquidation (MVL) and Creditors Voluntary Liquidation (CVL) are entered into voluntarily, there are several key differences to be aware of. The reasons for opting for the procedure tend to be different, as are the proceeds of assets realised through both processes. After a members voluntary liquidation, the proceeds go to the company shareholders. However, the funds realised through a creditors voluntary liquidation will be returned to the creditors, once the costs of liquidation have been paid.
Essentially, an MVL is undertaken by solvent companies to wind up and distribute company assets, looking to release cash in the most tax-efficient method possible. This procedure will result in the end of your company, but you can extract the value of the business in cash. The final distributions of an MVL can be used as capital distribution, rather than profits. Similarly, if you are entitled to entrepreneurs relief, which we have touched on below, you can, typically, expect reductions in tax. A high rate taxpayer would, generally, expect their income to be taxed at 40-45%, but entrepreneurs relief could see that reduced to 10%.
Although members voluntary liquidation is entered into willingly by company directors, the voluntary winding up petition must be advertised in The Gazette. You can find further information on the procedure here. The MVL process is not considered an insolvency procedure, so will not affect your company in the same way as creditors voluntary liquidation, but both processes ultimately result in the closure of your business.
As mentioned above, entrepreneurs relief allows business owners liquidating a limited company to pay a lower rate of capital gains tax on the proceeds of the closure, rather than income tax. Entrepreneurs relief could see some shareholders charged 10% capital gains tax on the distribution they receive, which is immeasurably more favourable than dividend taxation rates.
However, as a note, HMRC has recently brought out changes to entrepreneurs relief to be aware of. For example, if you choose to close your business through members voluntary liquidation, with 10% tax capital gains tax charged using entrepreneurs relief, but open a business of the same nature, trading within two years - HMRC may believe you closed the previous business for tax advantages, and will reclassify this as income leaving you liable for income tax and national insurance contributions. You can read more about the HMRC entrepreneurs relief changes here.
Creditors voluntary liquidation is initiated by the directors and shareholders of the business, where they are looking to liquidate a company which is unable to pay its debts. Unlike an MVL, the CVL refers to an insolvent company, but both processes must be carried out by a licensed insolvency practitioner (IP). By entering creditors voluntary liquidation, you limit personal liability and avoid the threat of compulsory liquidation.
A CVL is designed to protect the creditors, and the licensed IP will work to realise company assets and recoup debts for the creditors. The threat of creditor pressure could be a primary reason for voluntarily entering into this process. You can find more information on the timeline here, and look into the order of payment for creditors here.
Employees will be made redundant due to the liquidation of the company. If the company is unable to meet the costs of employees’ redundancy entitlements, they may also be able claim to the Redundancy Payments Office for redundancy pay, notice pay, unpaid wages, and outstanding holiday pay. This also applies to directors who have contracts of employment with the company, and if you are struggling to pay the costs of liquidation may be used as an option to cover these.
As mentioned at the beginning of the article, the MVL is undertaken by a solvent company and is, subsequently, advertised in The Gazette. If the company has outstanding debts that have not been settled, this public notice of liquidation could lead to creditors coming forward and submitting claims against your business, possibly pushing your firm to insolvency. If the company becomes insolvent or the liquidator discovers it is insolvent, the liquidation will then be converted into a CVL.
If this happens there is the chance that criminal charges may be brought against the director of the company. It is therefore important that full disclosure is given as if it emerges that a company is insolvent after giving a declaration of solvency, you will likely face serious repercussions.
If you are looking to close your business, but unsure which of the two processes is most suited to you, don’t hesitate to get in touch. Our business rescue experts are licensed insolvency practitioners and can offer guidance on which process will work best for your corporation.
