****UPDATE 18 MARCH 20****: New Off-payroll working rules announced see – https://www.shipleystax.com/coronavirus-off-payroll-ir35-reforms-to-be-postponed-until-april-2021/
Do the off-payroll working rules apply to you? Are you considering winding up your personal service company in April? We explain generally the best way to wind up your company from a tax perspective.
Come April 2020, the much maligned off-payroll working rules come in effect and many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because that tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies with no choice but to go on the payroll or an umbrella company.
Where the personal service company is not needed, what is the best way to wind it up and extract any remaining cash?
Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.
The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.
If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.
Members’ voluntary liquidation (MVL)
Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.
An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.
One important pitfall which many fail to appreciate is that the availability of entrepreneurs’ relief is not automatic and must be claimed based on facts. Using a liquidator to wind up a company does not automatically mean the company shares will qualify for entrepreneurs’ relief, the shareholder needs to ensure that the shares will qualify for the relief as the company may fail one or more the tests.
If you are thinking of liquidation and would like to check whether you qualify for entrepreneurs’ relief, please call us on 0114 275 62 92 or email us at email@example.com.