Contractors – time to liquidate your limited company?

You’ve been a contractor for a number of years now. You’ve rightly, correctly, and legally enjoy the tax benefits of running your own limited company when you’ve been carrying out work for the bank of reliable and well-paying clients it’s taken you a long time to build up. The amount of value you’ve added to your clients’ businesses must surely run into millions through the innovation and input you contributed.

 

You’ve followed the rules. You’ve done everything HMRC has asked of you. You’ve gone to extraordinary lengths to make sure that your work remains outside the scope of IR35. You’ve done nothing wrong.

 

HMRC disagrees

 

HMRC is, to the best of our knowledge, the only government department that has the right to declare you guilty as charged – no presumption of innocence is required.

 

At a stroke in April 2017, they declared that all contractors working for public sector bodies are guilty of IR35 evasion by changing the rules so that the client was now responsible for declaring whether or not your engagement with them was within IR35 or not. Your clients, understandably scared of making the wrong call, will err on the side of caution and declare you and your fellow contractors as being within IR35, afraid of the penalties that will come their way if the make a wrong declaration.

 

From either April 2019 or April 2020, the same rules governing public sector contracts are, according to most tax commentators, likely to be applied to all private sector contracting arrangements as well.

 

Taking out the cash left in your business

 

What if there’s £150,000 in your limited company’s bank account? What if you intend on winding down your limited company because the changes to the rules mean that, from now on, it’s probably better to use an umbrella than a limited company?

 

You could take out the £150,000 as a mixture of salary and dividends. You could even do it over two years. However, the chances are that you will pay a significant amount in income tax and dividend tax to do so.

 

Is there a cheaper way? Yes.

 

Members’ Voluntary Liquidation (MVL)

 

Shareholders within a business can choose an MVL to liquidate their company. An MVL is handled by an administrator (just like other types of liquidations) and MVLs are used when there is sufficient cash in the bank (or assets which could be sold prior to liquidation) to meet all creditor obligations.

 

When you place your company into an MVL, the money remaining in it is paid out to you and to other shareholders as a capital distribution. If you qualify for Entrepreneurs’ Relief, the tax you’d pay on the cash you took out as a capital distribution would be charged at 10% (up to a lifetime value of £10m). To qualify for Entrepreneurs’ Relief, you need to have held 5% ownership of the shares in that company (together with voting rights).

 

If there was £150,000 left in your business bank account, you’d pay 10% of £150,000 minus your annual capital gains tax allowance of £11,700. So that’s (£150,000 - £11,700) = £138,300 * .1 = £13,830.

 

You would declare the payment on your next self assessment form.

 

Sounds easy enough?

Yes, it is. However, there are two things you have to be careful about:

 

• Make sure you pay off in full any overdrawn director account loans prior to the date of the MVL either by transferring the cash in from your personal account or from the capital distribution after liquidation (there must be enough cash in your business account to do this). If you don’t do this, HMRC may try to claim that S455 tax applies and if they do try, you will be at a significant tax disadvantage

• You should not set up any business in a related field within 2 years of the MVL or HMRC may treat the liquidation as a tax evasion measure and then they will come after you for what they perceive that you should have paid.

 

Starting an MVL

 

Before you do anything, please call us today on 01235 768 561 or drop us an email to enquiries@pantheraaccounting.com – we’ll be back in touch with you shortly. An MVL requires planning and input from an accountant so please do involve us in the process so that you keep as much money as you can.