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Closing your limited company ahead of IR35 private sector reform

Workplaces across the country have experienced a period of unstable trading following a change in consumer buying habits as a result of Covid-19 and social distancing measures. As physical shopfronts were instructed to elevate their safety provisions to mitigate the spread of the virus, many continue to fight and showcase resilience, however, a number may be contemplating closure before the financial health of the business takes a hit.

The coronavirus pandemic has granted business owners an opportunity to look back on achievements, their position in life and celebrate milestones, leading many to arrive at the realisation that they would prefer to pursue a well-deserved exit from their limited company. Several mitigating factors including the upcoming IR35 private sector reform, the desire to switch career paths or redirect business efforts may contribute to this decision.

If your business is soaring financially, however, you believe that it has naturally reached the end of its lifetime and wish to close shop, there are careful considerations you will need to take when determining the time frame for company liquidation or the sale of your business. If you are contemplating closing your limited company after April 2021, here are some measures which could impact your financial position.

IR35 reform affecting private sector contractors

The public sector IR35 reform has been subject to much criticism as the measure is likely to raise the tax liabilities of selected private sector contractors, bringing it in line with that of traditional PAYE employees, without offering the same rights and benefits. The measure has been hit with notes of discontentment following accusations of inaccuracy against HMRC’s Check Employment Status for Tax tool (CEST) which is to be used by end parties to dictate the employment status of contractors. In addition to industry revolts, the Association of Independent Professionals and the Self-Employed (IPSE), the industry body representing the flexible workforce, continues to actively campaign against the IR35 private sector reform, calling for an urgent review.

The reform is likely to drastically reduce the take-home pay of contractors working for medium-to-large companies in the private sector, caught by IR35. If you are likely to be affected by this measure, you may be on the lookout for an alternative operating structure, such as an umbrella company, leading to the closure of your limited company if opting for dormancy is not an option you want to consider. If you are in this position, it may be in your best interests to shut shop before April 2021 when the measure is due to come into force, following guidance from your accountant after assessing the available options.

Entrepreneurs’ Relief lifetime limit reduction

If your business is financially healthy with unrestricted cash flow and liabilities which can be easily repaid, you may seek a Members’ Voluntary Liquidation (MVL) through which to close your business. This formal procedure can help you liquidate your profitable business and distribute funds amongst shareholders cost-efficiently. In order for this route to be financially efficient and taking into consideration the associated costs, you should have retained profit in excess of £25,000. If you have significantly lower in reserves, an alternative route such as dissolution may be better suited.

Any retained profit will be treated as capital, rather than income, which reduces your tax liability as this will be subject to Capital Gains Tax – not Income Tax. You can further mitigate this as is you qualify for Asset Disposal Relief, previously known as Entrepreneurs’ Relief before April 2020, you can take advantage of Capital Gains Tax at a flat rate of 10 per cent on qualifying gains.

At the 2020 Budget, the Chancellor of the Exchequer, Rishi Sunak, announced a reduction to the lifetime limit for Entrepreneurs’ Relief, now Asset Disposal Relief, from £10 million to £1 million for disposals made on or after 11 March 2020. Take heed of this change as it could significantly bite into your earnings if you are a higher-earning contractor, changing the way you retain funds.

As the days draw closer to the IR35 reform which was originally due to come into force in April 2020,  are still in good time to plan their exit/company closure route. The routes available to you when closing your limited company ahead of the IR35 reform will depend on the health of your business, ie. whether it is solvent or insolvent.