Helping contractor clients through a Members’ Voluntary Liquidation
With off-payroll working rules set to hit the private sector and with many companies set to make blanket ban decisions not to take on limited company contractors many of those contractors may choose or be forced to change direction. John Bell explores the process of closing down their PSCs.
Despite pledges by some of the leading political parties to ‘review’ IR35, many stakeholders believe we are still on course for the private sector roll-out of the off-payroll legislation come April 2020.
Faced with being deemed an employee and unable to continue working through their own personal service companies (PSCs), many contractors may be considering their options. Some could choose to work through a different model, like an umbrella, but many may decide to close down their limited company and pursue alternative paths.
Many accountants will have some clients who are contractors working in the private sector and guiding them through the process of ascertaining whether a contractor is inside IR35 or outside IR35. If a contractor is deemed inside IR35 or has been told the company they work with will no longer be using contractors, they will be seeking an accountant’s advice about what to do with their company now they no longer need it.
It is an accountant’s job to help ensure a contractor’s limited company is in the optimal condition before entering a formal solvent liquidation process.
Here is his advice for accountants on Members’ Voluntary Liquidation (MVL) to share with contractors considering closing their companies.
What is a Members’ Voluntary Liquidation?
An MVL is a process used to wind up the affairs of a solvent company and typically used where a company has come to the end of its life. The Off-Payroll reforms will undoubtedly prompt such a process but retirement or entering full-time employment could also be valid reasons.
The process of an MVL facilitates a controlled exit enabling shareholders to realise any investment in a tax efficient and advantageous way, as any money distributed to shareholders represents a return of capital, on which capital gains tax is payable by the shareholder.
Where the assets of a company are more than £25,000, any capital distribution can only be carried out by a liquidator. And, any distributions found by a liquidator are taxed as capital distribution, which is tax on the capital gain, the gain in the value of the shares compared with the amount which the shareholder paid for them.
The advantage for contractors is that money received as a capital distribution may qualify for entrepreneurs’ relief. However, the shareholder must own at least 5% of the shares for at least one year prior to liquidation and any assets must be distributed within three years.
Once an accountant has agreed with a contractor that an MVL is the right option, here is a checklist of necessary first steps to take as part of the process:
- Ensure the final accounts are prepared up to the date when the company is planning to cease trading.
- Deregister for VAT and also deregister as an employer.
- Pay all creditors and any outstanding charges. This could be money owed to HMRC, clients, suppliers or other trade creditors.
- Ensure the final VAT return and corporation tax return is submitted – when the company is placed into liquidation, another short return will need to be submitted.
- Sell any stock or other assets; they can be sold to a contractor or a third party. Alternatively, these assets can be distributed by the liquidator as part of the MVL.
- Consider any loans in place. If the company owes the director any money, this amount will be classed as an outstanding liability and needs to be settled. Similarly, if a contractor, as the director, owes his or her company money then this needs to be sorted out before the liquidation process begins. Whilst these funds will be distributed back to the contractor as part of the MVL process, it is important that this is done in order to benefit from entrepreneurs’ relief.
Once you have discussed the MVL process, here are some answers to more questions your client, the contractor, may ask:
What is the administrative process?
Firstly, apply to Companies House using a DS01 form which contractors will need to complete to start the process to close a company. Any co-director, such as a spouse, will also need to sign the form.
Any shareholder, creditor, trader, insurance company and bank will need to know about the plan and be sure that a contractor has no outstanding payments due to HMRC, such as Corporation Tax, VAT, NICs and, if applicable, PAYE.
All paperwork should be sent to HMRC along with a final set of accounts from the date of a contractor’s last set of accounts to the final trading day. Contractors must also inform HMRC to cancel any VAT registration, which could take up to three weeks to be confirmed, and submit a final company tax return which covers the period from the last tax return to the final day of trading, taking account of VAT on stock and business assets.
What about dividends?
It is important to extract any retained profits as a final dividend before liquidation begins. How a contractor takes this will depend on the exit route chosen and how much profit is left in the business. An MVL is the most tax-efficient method once the tax savings made from entrepreneurs’ relief has been taken into account.
What about any profits?
If the profit held in the company is under £25,000, shareholders must pay capital gains tax. However, if a contractor is eligible to apply for entrepreneurs’ relief, he or she would pay a tax rate of 10% regardless of the rate of personal tax paid.
If the profit is above £25,000, the distributions will be deemed as income and subject to income tax so the income is typically taken out as a final dividend not as salary.
The off-payroll reforms are looming and plans should be put in place now to navigate the solvent liquidation path smoothly. My advice to accountants is to talk to your contracting clients to assure them that the process doesn’t need to be daunting.