All the facts they need to know
Firstly the idea of being your own boss is a powerful one. It’s not for everyone to be sure, but if you ultimately like calling the shots for yourself then it makes sense to go ahead and do it.
Also some contractors work in industries where it is hard to find a regular company that would employ them so they have to form their own company in order to pursue their dream career and fill the niche they’ve successfully identified.
The second reason is that because contractors tend to be more entrepreneurial by nature, the inherent flexibility of their status is a great benefit.
Sadly, like all businesses, it can come with its own challenges including proving that they are actually independent contractors and not “disguised employees”.
This was the focus of Off-Payroll legislation aimed at making public sector recruiters responsible for assessing and vetting the true status of contractors working on their projects.
Brought in to help address tax avoidance, it has also caused a lot of worry and stress and ultimately led to many contractors to avoid working on public sector projects altogether to avoid uncertainty and doubt.
Sadly for them, the changes are due to be imposed on private sector employers too, so the dilemma will arise once again for contractors.
Many will have considered whether it’s worth all the hassle and expense of proving their employment independence and looking for a payroll job instead.
Covid-19 changed a lot of these calculations.
Why these changes make closing more beneficial right now
The IR35 or “Off-Payroll” legislation is due to be reinstated in April after being postponed for a year and many contractors who have been lucky enough to continue working and earning during the lockdown period will now find their roles and earnings coming under scrutiny in the near future.
We’ve previously written about the potentially expensive penalties for independent contractors who fall foul of the new rules.
The threat of IR35 might cause some to permanently look for the security of official PAYE employment or it might tempt others to bite the bullet and move forward with their retirement plans earlier than they would otherwise have wished.
Regardless of their personal circumstances, one final choice remains – what to do about their old company?
Optimistic contractors might want to keep their options open and hold onto the framework to provide them with a means of transitioning back into their previous independent existence when it’s feasible or economically advantageous.
But this could complicate their employment status if it’s queried by HMRC.
There would also be the legal duties of any company director even if they aren’t working for their own business at the moment. It might simply be easier to close their company down and reestablish one when material circumstances change.
So for any contractor facing this dilemma, there is an effective and efficient route that would allow them to tidy up any loose ends.
It could also be lucrative for them too.
We’re talking about a Members’ Voluntary Liquidation (MVL), the easiest and most straightforward way to close any solvent business – contracting or not.
Not every business will qualify for an MVL, however.
The business must be solvent, which means they must be able to reasonably pay their creditors in full within a 12 month period. They also need to have over £25,000 in assets and also have either stopped trading or be about to.
If all of these criteria are met then an MVL is definitely a strong option to consider.
Tax advantage
If you act quickly you can also take advantage of Business Asset Disposal Relief (BADR).
BADR, as Entrepreneurs Relief was previously known until April 2020, is the rate of tax paid on the assets of your business as they are realised. It’s significantly lower than the equivalent rate of income tax that would be paid on any assets if they were released as a dividend.
A licensed insolvency practitioner who would oversee your MVL could allow assets to be disposed of as Capital instead, which is usually taxed at either 18% or 28%, but qualifying assets under BADR are taxed at 10% – potentially representing tremendous savings.
Another reason to act quickly to close your company is that there’s a lot of speculation that the Chancellor will be looking to change the rules on BADR in the forthcoming Budget in March making it more difficult to take advantage of – or potentially eliminating it altogether.
So if you’ve been thinking about closing your contracting business – now is the perfect time to pull the trigger and do it.
Get in touch with us today and we can work with you on an MVL or several other methods of closing your business if it doesn’t meet the criteria.
We’ll arrange a convenient free virtual consultation for you with one of our expert advisors to discuss what you want to do.
Then we can work on a plan together to get there and let you get on with your next employment adventure.