IR35 Contractors: Act Fast to Avoid Wind-Up Tax

IR35 Contractors: Act Fast to Avoid Wind-Up Tax

5 March 2020

Limited company contractor that are caught under IR35 arrangements may need to act quickly if they want to close their companies and make the most of lucrative tax incentives.

If they wish to continue working flexibly, these contractors will also need to think carefully about how they offer their services, according to Umbrella.co.uk Director Miles Grady.

“Because we offer limited company support, umbrella payment solutions and a business liquidation service, we are in the best position to help a growing group of customers that have been caught out by IR35,” Miles Grady said.

“Ahead of the April deadline, we are seeing more and more contractors get caught out by IR35 and many have decided to close their limited companies using a members voluntary liquidation.

“This is the most tax efficient way to wind up a company, not least because the contractors can benefit from entrepreneurs’ relief. All the latest signals from Downing Street, however, suggest that this benefit could be scrapped, or at least seriously curtailed, at the next budget.

“Depending on their position, contractors may also need to consider the impact of the Targeted Anti-Avoidance Rule. This means that, if a contractor closes one limited company, they may not be able to open a similar company within two years of receiving the distribution without the entrepreneurs’ relief becoming taxable income.

“One of the only ways that these contractors can be tax efficient while they continue to work flexibly is if they start contracting through an umbrella company.”

Prime Minister Boris Johnson gave a clear indication that he would look to reform entrepreneurs’ relief earlier this month when he said that the incentive was serving to make rich people ‘even more staggeringly rich’.

His comments appear to reflect the conclusion of an 2019 Institute of Fiscal Studies report, which found little evidence that the relief acts as an incentive for investment.

New Chancellor Rishi Sunak, who only took over from Sajid Javid this month, will deliver his first Budget on 11 March. Whitehall rumours suggested that ousted Chancellor Javid was in favour of entrepreneurs’ relief reform, but Mr Sunak’s view is less clear.

The Targeted Anti-Avoidance Rule (TAAR), was introduced in 2016 to stop individuals from ‘phoenixing’ their companies and lowering their tax liability by withdrawing money as a capital payment.

These distributions will fall foul of TAAR when several conditions are met. Contractors are likely to fall foul of all of these conditions if, within a period of two years of receiving the distribution from the liquidator, they continue to be involved in a similar trade or activity.

One way to avoid this is by continuing to work through an umbrella company.

A members’ voluntary liquidation (MVL) remains the most tax efficient way to close down a company as long as there are significant cash reserves in the company. A Licensed Insolvency Practitioner can perform an MVL for a competitive price, distributing cash reserves as capital and attracting a low tax rate.

Want to learn more about our company insolvency services? Speak to a member of the team today. Call: 01625 544 677 or visit our dedicated website at www.umbrella.UK