What to do if you are closing your personal services business due to IR35

If you have been found to be inside the IR35, you must take steps to ensure that you are on the one hand staying legal, and on the other hand taking the route that will benefit you the most if you plan to close your limited liability company.

This is important because, for example, if you simply liquidate your business, you will pay residual asset tax at 40%, but if you apply for contractors relief, you will only pay 10%, says Cheryl Brown at Beacon Lip.

What are your options?

You can apply to Companies House for a voluntary company deregistration, but this may not be granted if the company has reached agreements with its creditors or has recently negotiated.

Voluntary Member Liquidation (MVL) may be the most appropriate course of action.

MVL can be used to shut down a solvent business, which has simply come to the end of its natural life. The reasons could be IR35, but could also include the fact that you are retiring or re-entering a job.

MVL allows shareholders to benefit from their investment. However, capital gains tax must be paid on the money they earned on their initial investment. And if the assets of the company are over £25,000, distribution of capital can only be undertaken by the liquidator.

The advantage we noted above is that this capital distribution could benefit from the entrepreneur’s allowance, but only if the shareholder holds at least 5% of the shares, if this holding has lasted at least twelve months before liquidation, and if the assets are distributed within three years.

How do you close a business?

You should apply to Companies House using Form DS01. The co-directors will also have to sign the form. All stakeholders will need to be informed of the plan: these include shareholders, creditors, your insurance company and your bank. The contractor must not have any outstanding debts to HMRC: these may include VAT, NICs, PAYE and corporation tax.

HMRC must receive all documents including a set of accounts for the period from the contractor’s last deposit to the last trading day. VAT registration must be cancelled. And a final tax return must be completed.

What about the final dividend?

Before the start of the liquidation, it is imperative to take the retained earnings as a final dividend. Exactly how this is accomplished will depend on the amount of profit and the chosen exit strategy. MVL remains the most tax-efficient vehicle once contractor relief is taken into account.

If the company’s profit is more than £25,000, distributions will be treated as income and will be subject to income tax. The income is generally considered the final dividend, rather than a salary. If it is less than £25,000 shareholders will pay capital gains tax. But, if contractor relief is allowed, the contractor would only pay 10% tax, regardless of their personal tax rate.

Final Thoughts

Closing your business – particularly in light of IR35 – is a tricky and complex affair, with a number of different options and paths you can take. As always, it is prudent to seek advice from a licensed practitioner to be absolutely sure that you are pursuing the most tax-efficient strategy, while of course remaining compliant.

At Beacon Lip, we are fully licensed and qualified to assist with a business liquidation and we do not charge for the first meeting. Learn more here.

Veronica J. Snell