The introduction of the IR35 reforms has significantly impacted limited company contractors in the UK. Many contractors are now reconsidering their operating structures as working through a limited company is no longer as tax-efficient as it once was. If you’re an IR35 limited company contractor facing this dilemma, it’s essential to understand your closure options and the implications of each route. In this blog, we explore the various closure options for IR35 limited company contractors to help you make an informed decision.
Why close your IR35 limited company?
The off-payroll working rules, commonly known as IR35, have shifted the responsibility for determining employment status to the end client or agency. This change has led to many contractors being deemed ‘inside IR35,’ resulting in reduced tax benefits and administrative burdens. For many, continuing to operate through a limited company is no longer worthwhile, leading them to explore closure options.
Before taking any action, it’s essential to understand the available pathways and the financial and legal implications involved. Here are the primary closure options for IR35 limited company contractors:
1. Voluntary strike-off
A voluntary strike-off is a straightforward and cost-effective way to close a limited company with no debts and has ceased trading for at least three months. You can apply to have your company struck off the Companies House register using Form DS01.
Key considerations:
- Eligibility: The company must have ceased trading, settled all liabilities, and not be involved in legal proceedings.
- Tax implications: Any remaining funds distributed to shareholders are treated as capital gains, which could be tax-efficient if within the Capital Gains Tax allowance.
- Risks: Creditors have the right to object, and the company can be reinstated if outstanding debts are found.
This option suits contractors with minimal reserves and no outstanding debts.
2. Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation is a formal process for closing a solvent company. It involves appointing a licensed insolvency practitioner to liquidate the company’s assets and distribute the proceeds to shareholders. This option is particularly attractive for contractors with significant retained profits.
Key considerations:
- Tax efficiency: Funds are distributed as capital gains rather than income, allowing shareholders to benefit from Business Asset Disposal Relief (previously Entrepreneurs’ Relief) and pay a lower rate of Capital Gains Tax.
- Costs: MVLs are more expensive than voluntary strike-offs due to the involvement of an insolvency practitioner, but the tax savings often outweigh the costs.
- Legal obligations: A statutory declaration of solvency is required, confirming the company can pay its debts within 12 months.
An MVL is ideal for IR35 limited company contractors who have accumulated large reserves and want to extract the funds tax-efficiently.
3. Creditors’ Voluntary Liquidation (CVL)
If your IR35 limited company is insolvent – meaning it can’t pay its debts as they fall due – a Creditors’ Voluntary Liquidation may be the best option. In this process, the company’s assets are sold, and the proceeds are distributed to creditors.
Key considerations:
- Insolvency practitioner involvement: A licensed insolvency practitioner must be appointed to manage the liquidation.
- Directors’ responsibilities: Directors must act in the best interests of creditors once insolvency is identified, including ceasing trading to prevent worsening the financial position.
- Impact on directors: Although a CVL formally closes the company, directors may face restrictions if wrongful trading is proven.
This option suits contractors whose IR35 limited company is struggling financially and can’t pay its debts.
4. Dissolution vs liquidation: What’s the difference?
Understanding the difference between dissolution and liquidation is essential:
- Dissolution: A voluntary strike-off where the company is removed from the Companies House register. It’s more straightforward but only applicable to solvent companies with no debts.
- Liquidation: A formal process managed by an insolvency practitioner, suitable for both solvent (MVL) and insolvent (CVL) companies.
When considering closure options for IR35 limited company contractors, it’s important to assess the company’s financial position to determine the most appropriate route.
Which closure option is right for you?
Choosing the right closure option depends on several factors, including your company’s financial position, tax implications, and your long-term career plans. Here’s a quick guide:
- Voluntary strike-off: Best for small companies with minimal reserves and no debts.
- Members’ Voluntary Liquidation (MVL): Ideal for solvent companies with substantial retained profits seeking tax-efficient distribution.
- Creditors’ Voluntary Liquidation (CVL): Necessary for insolvent companies unable to pay creditors.
It’s highly recommended to get advice from a professional to evaluate your circumstances and choose the most beneficial option.
Final thoughts
Deciding to close your IR35 limited company is a big step. Understanding the available options – voluntary strike-off, MVL, and CVL – helps you make an informed decision that suits your financial situation and future plans. By carefully evaluating your company’s financial health and considering the tax implications of each route, you can choose the most effective and efficient closure option.
It’s essential to consider factors such as the level of retained profits, any outstanding debts, and your personal financial goals. If you’re unsure which path is best for you, seeking professional advice can provide clarity and peace of mind, ensuring a smooth and compliant exit from your IR35 limited company. With the proper guidance, you can avoid costly mistakes and minimise the stress associated with the closure process, giving you confidence as you move on to the next chapter of your career or business.
Expert help for your company closure
Navigating the complexities of IR35 and deciding how to close your limited company can be overwhelming. Our team can help you understand your options and choose the best insolvency solution for your needs. Our qualified, knowledgeable Insolvency Practitioners, authorised by the Institute of Chartered Accountants in England and Wales, can provide free, impartial advice to ensure you liquidate your business cost-effectively. Contact us on the form below, via our live chat, email mail@simpleliquidation.co.uk, or call 0800 246 5895, and we’ll be happy to help.
