Although not yet announced it seems almost inevitable that private sector contractors will be forced onto payroll by HMRC reforms similar to that rolled out to the public sector.
There is of course much debate about the rights and wrongs of this as well as the horror stories of unscrupulous Umbrella Companies operating dodgy schemes.
It’s a shambles.
Planning your exit
But putting that aside it’s time for contractors to take stock and plan their exit. By doing this they have a chance of recuperating something against the future losses that they will inevitably suffer. How so?
Closing down via a Members Voluntary Liquidation
It will come as no surprise that as a result of the likely on payroll changes to how contractors are paid there will be a raft of limited companies closing down.
The best advice an accountant can give to someone looking to close down their company is to consider the Members Voluntary Liquidation Route.
Don’t get too hung up with the title containing the word liquidation! The first step is a statement of solvency i.e. that the company has funds. There is no impact whatsoever on credit ratings, credit scores of the company and / or directors by choosing this close down route.
So why should you choose it? The answer is simply that you’ll be better off. Any money extracted from the company during the close down via this route could be eligible for Entrepreneur’s Relief which means a tax rate of 10%, after your usual capital gains tax annual exempt amount (currently £11,700).
So if you have say £50,000 in the business, rather than take that by way of dividends attracting dividend tax at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate) you’d take it as a capital distribution. The first £11,700 is free of tax and the rest (subject to fulfilling certain conditions) would be taxed at 10%.
Maximise the capital distribution
Of course if you are canny you can maximise your capital distribution by extracting money from your limited company by way of a Director’s Loan, instead of dividends, which would be re-paid when you receive the capital distribution.
NOT A TAX SCHEME
The important thing to note that this is not a tax scheme. It is legal and above board. Entrepreneurs Relief was introduced for people starting up their own business to receive some tax relief for their efforts when they came to exit the business.
The only difference with using this relief for contractors it that the contractor could be FORCED to exit their business when the private sector on payroll changes are brought in.
What do you need to do now?
The first thing is to discuss this with your accountant bearing in mind that some accountants may not have the experience and expertise to take this on. If that is the case for your current accountant then, given the amounts at stake, change accountants NOW!
So once you’re chatting to the right accountant a plan can be devised that includes moving from Dividends to a Director’s Loan showing the tax that could be payable on exit and close down.
The accountant should be able to guide you through the process and work with you and an appointed Liquidator to bring this plan to fruition.
This does need careful planning and certainly you need an accountant who knows how it works and has contacts with a reputable liquidator.
Word of warning
We have seen in the past that some Contractor Accountants charge clients upwards of £500 to close down their limited company.
It doesn’t have to be this much at all; in fact the Companies House filing fee to close a company is just £10 or £8 is the application is submitted online.
What you need to do to close your company
Assuming that the company isn’t insolvent, generally to close down a limited company you need to:
- Bring the accounts and tax returns up to date and file them as necessary
- Settle any outstanding taxes (PAYE, VAT, Corporation Tax as appropriate)
- Close down the PAYE scheme
- De-register for VAT
- Clear out the company bank account
- File a DS01 form at Companies House and wait for the strike off process
You may need an accountant to do this but the fees charged should not be excessive and can be reduced if you do some of the work yourself like de-registering for VAT and submitting the DS01 form.