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New rules introduced from 6 April 2021 have made it extremely difficult for businesses to outsource work to individuals working through their own limited companies, leaving many contractors and consultants to consider taking on new roles as employees, with them asking what to do now with potentially redundant corporate structures.
For just over 20 years now, contractors and consultants working through their own Limited companies have had to consider whether they should be taxed as if they were employees of their clients or with the benefits which are afforded to businesses operating through companies (lower rates of tax on profits in the company and on income extracted by the Director/shareholder).
With a lower application rate of the IR35 rules than HMRC expected, they have come to the conclusion that many people are not paying the right amount of tax. They sought to redress this by updating the rules back in 2017, to put the onus on making the decision on to public sector “clients” have to consider whether the contractors or consultants would be their employees if there was no limited company in place between them and the individual worker.
It was clear then that this was a precursor to a wider clampdown which would involve the private sector as well.
As of 6th April 2021, any medium or large UK business must consider the “employment” status of any worker that they outsource to. Under the old IR35 rules, many different factors have to be considered, such as the worker’s responsibilities, who controls what they do, how and when and who by, whether tools and equipment are supplied etc. With so many different factors, it is very difficult to be certain of the correct status. HMRC have published a Check Employment Status Tool on their website, however, this does not provide a definitive answer and is used simply as an indication.
If the outcome is that the worker would be an employee if it were not for the fact that a limited company was contracted by the business end-user, then that business has to include the payments on their own payroll, deducting PAYE income tax and Employers and Employees National Insurance (NIC), before paying the contracting company.
If they decide incorrectly that the worker would not be an employee and continue to pay gross amounts across, they run a huge risk of HMRC asking for payment of income tax and NIC that should have been withheld from the contractor along with interest and potential penalties, without any simple recourse to that contracting company.
This has led to many UK businesses restructuring their operations and avoiding using these “off-payroll” contractors and workers, and instead insisting on employing individuals (either in temporary or permanent roles), to ensure they control their costs.
Therefore there is likely to be huge numbers of these personal service companies stuck in limbo.
Unless you close down the company formally, you will still have responsibilities as a director to file certain returns to Companies House and HMRC.
However, unless all assets of the company (any cash, property etc) are distributed, you are not able to close down the company.
You can consider making dividend distributions, however, if you have significant assets built up, you may find the income tax rates much higher than you have previously been used to. The top rate of income tax on dividends is 38.1%.
Another alternative would be to consider a members’ voluntary liquidation. Under this route, distributions are treated as capital with tax rates between 10% and 20% depending on a number of factors. Care does still need to be taken however, as it possible for these distributions to be considered as income in the following two years, if the shareholder carries on the same or similar trade as a sole trader, partnership or within a new company that they are connected with.
In order to place a company into Liquidation, first the directors hold a board meeting and resolve that the company is solvent and they resolve to convene a meeting of shareholders to ask them to wind up the company. A majority of the directors sign a Declaration of Solvency in front of a solicitor to confirm their view that the company will be able to pay its debts.
The shareholders’ meeting can be held on the same day if the shareholders agree and they then pass resolutions to wind up the company, appoint Liquidators and approve the Liquidators’ fees. As noted above, if shareholders’ consent to short notice cannot be obtained, it will be necessary to provide the statutory notice for a general meeting – usually 14 days. The Liquidator must be a licenced Insolvency Practitioner.
The Insolvency Practitioner would prepare all of the documentation, minutes and resolutions to record these meetings. They would also usually liaise with the company’s accountant to prepare a statement of assets and liabilities which will accompany the Declaration of Solvency.
After the Liquidators are appointed, they take steps to realise the assets of the company (often that is primarily just cash), pay any creditors and distribute the surplus funds to the shareholders. The Liquidators liaise with HM Revenue & Customs and the company’s accountants to ensure that any outstanding returns are filed and they would seek specific clearance from HMRC that there are no further liabilities before they took steps to close the Liquidation.
On the basis that shareholders provide an indemnity in relation to any unanticipated liabilities, a Liquidator could potentially make the first distribution within 7 days following the commencement of the Liquidation. It would be usual for the Liquidator to hold back some funds as a provision although the amount of this provision can be discussed for each individual case.
Once the initial information is received from the client and a strategy for dealing with the Liquidation is agreed upon, the Liquidator will usually seek to agree on the basis of his remuneration as a set amount plus disbursements.
Whilst the formal process for placing a company into Liquidation can be very quick, there is a benefit to having time to plan the procedure before the Liquidation formally commences. For example, it is advisable that a provision for corporation tax for the cessation period is calculated and paid prior to the Liquidation to avoid unnecessary interest accruing, it is often advisable to move funds prior to the Liquidation to reduce delays in returning money to shareholders, and it may be beneficial for bonds or other investments to be encashed prior to a Liquidation.
If you are in the position of being a director/shareholder of a company that you no longer have a use for, it may be worth having an initial free consultation regarding the possible benefits of a Members Voluntary Liquidation.
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