If you are considering closing down your limited company – possibly as a result of the April 2021 ‘Off-Payroll’ changes in the private sector – what is the most tax-efficient way of achieving this goal?
Impact of April 2021 Off-Payroll on ltd company contractors
New tax legislation coming into effect in April is set to cause some disruption for contractors and those firms that rely on contingent workers. It has been a tax that has been hotly debated over the years and was due to become law in April 2020 before a global pandemic forced the Chancellor to press pause on it.
Despite fierce opposition by stakeholders and the contracting community, the Off-Payroll legislation will now be rolled out to medium and large-sized companies in the private sector in just a couple of months.
The new rules will mean that hirers will be responsible for determining a contractor’s employment status and many may opt to only work with contractors via PAYE. For contractors who work through their own limited companies, it could mean that their career options could be reduced, so many might be assessing whether the incoming rules will be a big enough change for them to consider closing down their limited companies.
John Bell is a chartered accountant and insolvency practitioner who founded licensed insolvency practitioners Clarke Bell in 1994. Here, he addresses the concerns of contractors considering winding up their companies to put plans in place well before April 2021. He explains the best route to follow and some actions contractors need to take now if they want to get their distributions made in this financial tax year.
What is a Members’ Voluntary Liquidation (MVL)?
If a contractor is 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 to close a solvent company – particularly if the assets of a company are more than £25,000.
An MVL is an HMRC-approved process and a licensed insolvency practitioner must be appointed. 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 a company into an MVL it is a clear illustration that someone has been running a successful company.
Via the MVL process, with the help of a licensed insolvency practitioner who will liquidate a company, the company’s reserves can be distributed as capital, subject to capital gains tax (CGT) at either 18% or 28%. Ordinarily, any remaining profits would be distributed as income (via a dividend declaration), subject to higher rates of dividend tax.
Through an MVL, a contractor can also take advantage of Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief prior to 6th April 2020). If someone qualifies for this relief, this can mean that CGT will be paid at a rate of 10% on qualifying assets, which can translate into considerable tax savings. Each shareholder of the limited company could also benefit from the individual tax-free CGT allowance of £12,300 (2020/21); the Annual Exempt Amount. If there are multiple shareholders, this can be highly efficient.
Steps to take if you want to shut up shop this tax year
Contractors who want to close their companies this financial tax year would be advised to:
- Contact their accountant to alert them of their plans and prompt them to complete their final accounts
- Work with their accountant and chosen licensed insolvency practitioner to alert the bank to distribute funds from their company account to a specific client account that the appointed practitioner sets up for them
- Allow time for the practitioner to place statutory ads and allow them to run their course. Statutory ads are placed in the London Gazette to alert creditors to come forward and lodge a claim on monies.
The combined effects of Brexit, Covid-19 and the new Off-Payroll tax have hit businesses hard and for those company directors thinking that closing down their company is the best course of action for them, I would urge them to act now so that they can steer the solvent liquidation path smoothly and effectively.