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How accountants can help contracting clients as new tax rules take effect

For the last two years, contractors working through their limited companies have been counting down the months until their lives and livelihoods were to be impacted by the Off-payroll legislation. 

The new tax rules will mean that hirers in the private sector will be responsible for assessing a contractor’s employment status and whether they can continue to work as genuine self-employed contractors ‘outside IR35’ or whether their role would be caught ‘inside IR35’ and they would be deemed as employees. 

The changes are set to wreak havoc on the flexible workforce and the firms that rely on them.

 A rollercoaster year

Then came Covid-19 which saw the government press pause on implementing the legislation and, as the country lurches from one lockdown to another and with no definitive date set when a vaccine becomes available, many are speculating that the government may well delay the roll-out again, which is currently set to happen in April 2021.   

It has been a rollercoaster year for businesses of all sizes and, despite the emergency measures announced by the Chancellor in an effort to keep the economy afloat, not every contractor will want to carry on trading. 

Some will want to retire earlier than they’d previously planned – to escape the turmoil and ‘cash in’ all their hard earnings. Others, however, will have seen their income falling to such an extent that they are now having cash flow problems and are unable to pay some of their bills.  

Some may be considering taking up a PAYE role for job security whilst others may be forced to put their retirement plans on hold and continue working until they feel confident that their pension pot will serve them well.

Covid-19 and the new Off-Payroll tax have hit businesses hard and some company directors now think that closing down their company is the best course of action for them.

A Members’ Voluntary Liquidation is the best option for contractors

If a contractor is planning on moving into an employee/PAYE role, retiring or pursuing some other life or career plan then a Members’ Voluntary Liquidation (MVL) is likely to be the most tax-efficient way to close a solvent company – particularly if the assets of a company are more than £25,000. 

An MVL is an HMRC-approved process and a licensed insolvency practitioner must be appointed. While it may have a negative-sounding ring to it – with terms like ‘liquidation’ and ‘insolvency practitioner’ – there is nothing negative about it. Quite the opposite, in fact. By placing a company into an MVL it is a clear illustration that someone has been running a successful company. 

An MVL allows a contractor to draw any remaining profit as a dividend, paying income tax on the dividend amount.  With the help of the licensed insolvency practitioner who will liquidate a company, the reserves can then be distributed as capital, which are then subject to capital gains tax (CGT) at either 18% or 28%.  

Through an MVL, a contractor can also take advantage of Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before 6 April 2020).  

If someone qualifies for this relief, this can mean that CGT will be paid at a rate of 10% on qualifying assets, which can translate into considerable tax savings.  

Each shareholder of the limited company could also benefit from a tax-free allowance of £11,000, the Annual Exempt Amount.  If there are multiple shareholders, this can be highly efficient. 

To ascertain eligibility for Business Asset Disposal Relief, contractors should speak to an accountant and also look at  Gov.uk

Free and confidential advice is available

Off-payroll (IR35), Covid-19 combined with Brexit are all things that are likely to have a huge impact on contractors and their limited companies and most firms of insolvency practitioners will offer free and confidential advice.  

Navigating the solvent liquidation path can be done smoothly and painlessly. My advice to accountants is to start the MVL conversation with your contracting clients now so that they can steer a steady insolvency course and move on with their lives and careers.

 

Byline by John Bell, chartered accountant and insolvency practitioner who founded insolvency firm Clarke Bell in 1994. 

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