We are all going through unusual times – both personally and in our work. And, if you’re a contractor with a limited company / Personal Service Company (PSC) you will have been through more than your fair share of turbulent times recently.
In the last two years contractors / PSCs have been bracing themselves for the impact of off-payroll legislation (IR35) on their lives and livelihoods, as the Government steamrollered ahead with its plans to roll out the reforms to the private sector; as it, wrongly in many cases, believed some contractors should be deemed as employees and not genuine self-employed contractors. Then came Covid-19 and once again those self-employed workers came in for another blow as the pandemic left many without work overnight, although there was some relief as Off-Payroll was paused until April 2021. And there is also the matter of Brexit to contend with…which is having a huge effect on a lot of businesses in the UK.
It has been a bumpy few months for businesses of all sizes and, despite the emergency measures announced by the Chancellor in an effort to keep the economy afloat, not every contractor will want to carry on trading. Some will want to retire earlier than they’d previously planned – to get away from all the turmoil and ‘cash in’ all their hard earnings. Others, however, will be seeing their income falling to such an extent that they are now having cash flow problems and are unable to pay some of their bills.
The combined effects of Brexit, Covid-19 and the new Off-Payroll tax have hit businesses hard and some company directors now think that closing down their company is the best course of action for them.
John Bell is the director and founder of the insolvency firm Clarke Bell, and his advice would be to take control of your situation and seek professional help as soon as possible.
The first question you need to answer is whether your company is solvent (has no debts) or is insolvent (can’t pay its debts). Having answered this question, you can then decide what is the best way for you to close your company down.
For a solvent company
If you are planning on moving into an employee/PAYE role, retiring or pursuing some other life or career plan then a Members’ Voluntary Liquidation (MVL) is likely to be the most tax-efficient way for you to close your solvent company – particularly if the assets of a company are more than £25,000.
An MVL is an HMRC-approved process and you must appoint a licensed insolvency practitioner. While it may have a negative-sounding ring to it – with terms like ‘liquidation’ and ‘insolvency practitioner’ – there is nothing negative about it. Quite the opposite, in fact. By placing your company into an MVL it is a clear illustration that you have been running a successful company.
An MVL allows you to draw any remaining profit as a dividend, paying income tax on the dividend amount. With the help of the licensed insolvency practitioner who will liquidate your company, your reserves can then be distributed as capital, which are then subject to capital gains tax (CGT) at either 18% or 28%.
Through an MVL, you can also take advantage of Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before 6 April 2020). If you qualify for this relief, this can mean that you will pay CGT at a rate of 10% on qualifying assets, which can translate into considerable tax savings. Each shareholder of your company could also benefit from a tax-free allowance of £11,000, the Annual Exempt Amount. If there are multiple shareholders, this can be highly efficient.
To see if you are eligible for Business Asset Disposal Relief / Entrepreneur’s Relief, you should speak to your Accountant and also look at the Gov.uk website.
For an insolvent company
If you are struggling to keep your head above water and have decided that it might be best to cut your losses and close down your company, then a Creditor’s Voluntary Liquidation (CVL) might be the best option for you once it is agreed by the shareholders. Liquidating your company voluntarily via this method, rather than a compulsory liquidation, is the best way of protecting your business reputation in the long run.
First and foremost, you should contact a licensed insolvency practitioner for some free and confidential advice to ensure that a CVL is the best option for you and your company. If it is, the insolvency practitioner will then work to collect all the necessary information to proceed with the liquidation. They will seek to gather a full list of creditors along with copies of accounts. As soon as the CVL process starts, your company will need to stop trading.
Your insolvency practitioner will lead you through the process step by step and you will need to hold a board meeting where the company directors meet to formally agree that the company is insolvent and cannot continue to trade. A members’ meeting will then be held and once this meeting is over your company will now be considered to be in formal voluntary liquidation.
Doing nothing is not an option when you are facing financial difficulties and, as a company director, you have a legal duty to do something about it.
Get your free and confidential advice before you decide what to do with your company
Off-Payroll (IR35), Brexit and Covid-19 are all things that are likely to have a huge impact on you and your company. If you’re thinking of closing down your company as a result – whether your company is solvent or insolvent – you should seek professional help to navigate you through the path that is best for you and your business.
Most firms of Insolvency Practitioners will give you with free and confidential advice. So, you really have nothing to lose by speaking to one.
About the author
John Bell is Director of insolvency firm Clarke Bell, which he founded in 1994.
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