Bev Budsworth MD of The Business Debt Advisor
IR 35 Changes
The Government has confirmed the IR 35 extension into the private sector and that this will apply to services carried out from 6 April 2020. This only relates to companies which are not small under Companies Act 2006 who qualify with 2 of the 3 definitions:-
- Less than £10.2M turnover
- Balance sheet total less than £5.1M
- No more than 50 employees
Medium to large employers will then be responsible for assessing whether contractors fall in or outside of the IR 35 rules. The assessment is hugely risky and signs are that these employers will refuse to allow contractors to work for them via Personal Service Companies (PSC). Contractors will have to chose either to work through Umbrella companies or it fortunate enough consider offers of fixed term contracts. Based on enquiries received already, it is clear that many contractors are looking to close down their company.
Possible changes to Entrepreneurs Relief
Changes to Entrepreneurs Relief “ER” were included in the Conservatives and Labour Parties Manifestoes with promises to review or scrap the relief in forthcoming budgets. ER is apparently costing the Treasury £2.4BN per year which they argue produces large benefits to the rich. ER has up to now benefitted contractors closing down their PSC.
Entrepreneurs’ Relief enables a business owner to pay tax at 10% on qualifying assets and gains, after the annual exempt amount. It is claimed as part of a personal tax submission for the period in which a capital distribution is received, and the following criteria must apply:
- The shareholder must own at least 5% of the shares;
- They must have been owned for at least one year prior to disposal;
- The assets must be distributed within three years of cessation.
With the impending risk that ER could be lost, contractors need to consider soon than later, how they close down their PSC.
Solvent Liquidation or MVL
Our previous blog on the benefits of solvent liquidation explain that this process, as far as PSC’s are concerned, is beneficial if the cash left in the company, after settling all outstanding liabilities including tax, exceeds £25,000. Less than this figure and the company can go down the striking off route as distributions made as part of informal closure which are less than £25,000 are not taxed as income (CTA 2010 “Corporation Tax Act”, s 1030A).
The Costs of MVL
Costs include the Liquidator’s fee to cover the work prior before and after the Liquidator’s appointment, statutory advertising and other necessary expenses. We will generally quote a fixed fee which will start from £2,000 plus VAT upwards depending on the complexity of the case.
Timescale to complete an MVL
It is usual for a sizeable proportion of the cash in the company to be distributed back to shareholders immediately following the Liquidator’s appointment. A balance will then be held pending confirmation from HMR & C that tax clearance has been granted and the latter can take up to 6 months. Delays in obtaining tax clearance will be caused by late filing of returns. To speed up the process all returns up to the date of cessation of trade need to be filed and all outstanding tax needs to be paid prior to the company being placed into Liquidation.
Insolvent Liquidation of Creditors Voluntary Liquidation “CVL”
If the PSC has tax or other debts outstanding and no funds available to settle the debts, then CVL may well be appropriate. It’s wise to get advice first as it is very likely that the director will have an overdrawn loan account and the Liquidator will be obliged to pursue the director for the amounts outstanding.
An overdrawn loan account generally arises where the director has drawn all the money out of the company (not as salary) which leaves the company unable to pay its debts. The Liquidator will take into account the director’s personal circumstances and is likely to allow time to repay the overdrawn DLA.
The CVL Process
The process for winding up a company was simplified by revised rules in 2016. Directors were previously required to attend meetings of creditors in person, most commonly the meetings in insolvent liquidation. This understandably caused apprehension about whether those involved would be questioned about the reasons for failure.
It is now quicker and easier to wind up private limited companies. New decision processes allow for virtual meetings and approval can even be obtained by deemed consent (a simple ‘yes’ or ‘no’ to certain resolutions). The new rules provide that a physical meeting cannot be convened unless this is requested by certain majorities.
There are many other reasons why it makes sense to use the voluntary liquidation process.
Clearly, if ER reforms are imminent there may be very little time for business owners and contractors to take advantage of the current relief. Although the process of placing a company into MVL and appointing a liquidator can be fairly swift, there is a clear incentive to act now. It is still possible to get a company into MVL and a distribution made prior to the budget on 11th March 2020 (based on the worst case scenario).
If you have any queries please fill out our Contact Form and we will be in touch. Alternatively, call our FREE ADVICE LINE on 0800 781 0990. Our team has extensive experience in dealing with solvent liquidations and can arrange an initial consultation at no cost, usually on the same day.