As of April 2021, the private sector restructured IR35 will bring about a big change in how contractors and other off-payroll employees function, as well as how they pay their taxes.
This crucial development came into full swing on April 6, 2021, and it will affect not only employees but every employer (companies and end clients) alike.
Under the new regulations, companies/end clients take on the full responsibility of classifying their employees as true contractors rather than regular staff, having them fall outside IR35 legislation.
The newly restructured system greatly affects the existing working practices used by contractors, making the operating models they use unsustainable. Now, the way forward remains irresolute. This is because vast majorities of end clients are keen on distancing themselves from contractors in a bid to not incur the wrath of accountability for incorrect IR35 decisions.
Overall, this major switch-up leaves contractors, who seek to transition from contractors to full-time employees, with Personal Service Companies (PSCs) that may need closing down.
IR35 and closing your limited company
Understanding IR35 legislation, as well as closure procedures, is crucial to successfully end your Personal Service Company (PSC). Having decided that you do not need a Personal Service Company, you can successfully close yours down by entering a formal liquidation process, using an informal closure procedure, or shutting it down at Company House.
If you decide to go the first route, by entering a formal liquidation process, you can either do so by entering a Creditors’ Voluntary Liquidation (CVL) or a Members’ Voluntary Liquidation (MVL). However, the nature of your Personal Service Company will determine the right liquidation option to use, that is if your company is solvent or insolvent at the time when you want it closed.
If your company has no funds to pay for either type of liquidation then the best option may be Administrative Dissolution. This process is used to close a company when there are no funds or assets to distribute. It can be used whether or not the company has debts but the rules must be adhered too.
If your company is solvent, then entering a Members’ Voluntary Liquidation (MVL) will enable you to shut down your PCS as well as collect all accumulated profit in a way that is both cost-effective and tax-efficient. Subsequently, directors can further reduce the rate of tax remunerated by taking full advantage of the Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief.
The main issue comes down to when your company, as at the time of closure, is solvent or insolvent. If you are unsure which is the right route you can call us on 0800 975 0380 for some free, no-obligation advice, or you can email us on [email protected].
The challenges contractors experienced during the COVID-19 pandemic
The Covid-19 pandemic greatly affected everyone regardless of social and financial status. For employers and employees, the past twelve months proved inherently difficult, as companies remained grounded with what seemed like no end in sight.
For most contractors, the Covid-19 pandemic led to a great reduction in the number of contracts they had. Others, however, got cut off from all contracts as companies were looking to find the light at the end of the tunnel before assigning upcoming projects.
The pandemic altered the sequence that contractors underwent in being paid. Aside from delayed contracts, companies began paying their contractors outside their stipulated period. Over time, the strain in the cash flow cycle left the PCS in financial uncertainties.
Governmental initiatives did help alleviate the conditions in which many contractors found themselves. The Coronavirus Job Retention Scheme (CJRS) and the Self-Employed Income Support Scheme (SEISS) are just a few of the initiatives put in place to aid contractors and other employees.
The idea behind these initiatives is somewhat retrospective, and an in-depth analysis shows that they did not assist contractors as well as many thought. Employees that collected their earnings as dividend found the CJRS to be unsuitable, while those working under a restricted company structure were ineligible for SEISS.
In a bid to combat the growing concerns, a majority of contractors will decide to opt for a government-backed loan to attain financial stability. Contractors would seek out financial assistance from either Bounce Back Loan Scheme or CBILS to keep them afloat throughout the covid-19 period. These loan schemes came into existence in 2020 where most people were of the opinion that the pandemic would last for just a short while.
Looking back, one can clearly see that the extended trade restriction caused by the prolonged nationwide lockdown had a grossly negative impact on all those who took these government-backed loans. This is because instead of providing a sustainable long-term financial situation, the continued reduced trade index meant that they could not pay what they owed on time.
Overall, these factors contributed to contractors finding themselves in a state of insolvency. This is because the funds they rely on for their everyday expenditures are those coming in from the company, and those funds are seemingly limited.
IR35 alteration and the need for a CVL or dissolution
Finding yourself in a state of insolvency is an unfortunate situation many contractors find themselves in. Seeking professional assistance from an insolvency specialist is the first step to resolving your situation. Diverse rescue and recovery options exist as a means of rescuing the company’s fortunes.
Although the means exist, the alteration to IR35 negates the need to own a PSC. If this were the case, it would be wise to subject your PSC to liquidation by entering a Creditors’ Voluntary Liquidation (CVL).
For those who do not understand the working principle of a CVL or dissolution, they are processes of ending insolvent PSCs.
In the case of a liquidation a certified insolvency practitioner does all the jobs on behalf of the company, including acting as a go-between with creditors, if a dissolution is used an insolvency practitioner does not need to be used which can keep costs down. At the end of both processes all outstanding debts are cleared with the exception of those secured using a personal guarantee.
Get free advice today
In conclusion, closing down your insolvent PSC is dependent on how proactive you are. It is essential that you seek the help of well-informed professionals who will guide you throughout your journey.
They will walk you through the options available and will help you make the best choice in the long term. Contact us today for some free, no-obligation advice on the best way to close your company down on 0800 975 0380 or email [email protected]
Related Articles
We're here for you.
As a dedicated team of Advisers and Consultants our aim is to help you fix the issues and solve the problems within your business.
Find out more →
