Navigating the complexities of IR35 can be challenging for contractors

When caught by IR35 limited company contractors may find themselves needing to close their limited companies. In such situations, a Members Voluntary Liquidation (MVL) offers a beneficial solution.

Tom Fox, Head of Insolvency at Umbrella.UK, provides insight into how limited company contractors can leverage an MVL to close their businesses efficiently and tax-effectively.

Contractors and IR35

The IR35 legislation aims to combat tax avoidance by contractors who operate through limited companies but work in a manner akin to employees. When a contractor is caught by IR35, they face significant tax implications, often making it unfeasible to continue trading through their limited company. For these contractors, as limited company owners, closing the company becomes a crucial step.

The Case for MVL – A Practical Example – IR35 Limited Company

Consider a Director of a IT consultancy business, who had been trading successfully for three years as a contractor and decided to cease operations upon securing an employed role. With net assets of nearly £300,000, the director sought the most tax-efficient method to close the company and extract the funds. The director’s company, which had consistently traded profitably, had only two creditors: HMRC for Corporation Tax and VAT, and their accountants.

Tom Fox explains, “The director explored the option of striking off the company by writing to Companies House. However, this approach would involve distributing the remaining funds as shareholder dividends, subject to a higher income tax rate of 33.75%. For a higher-rate taxpayer, this was less favourable compared to the 10% tax rate available through an MVL, thanks to Entrepreneurs’ Relief.”

The Benefits of an MVL – Contractors and IR35 – IR35 Limited Companies

An MVL allows limited company contractors to close their businesses formally while ensuring all creditors are paid. This method also provides significant tax advantages. “By opting for an MVL,” says Tom Fox, “the funds can be distributed as a capital distribution rather than income. This enables the shareholder to benefit from Entrepreneurs’ Relief, reducing the tax rate to 10%.”

The director, after consulting with tax advisors and Umbrella.UK Insolvency, determined that an MVL was the optimal route. The process involved appointing Umbrella.UK Insolvency to administer the MVL, ensuring all creditors were paid and the remaining funds were distributed to the shareholder efficiently.

Steps to Close a Limited Company, caught inside IR35, with an MVL

For contractors and limited company owners considering an MVL, the process involves several key steps:

1. Assessment of Solvency – Confirm that the company is solvent and can pay all its debts.
2. Tax Advice – Consult with a tax advisor to explore the benefits of an MVL and how it compares to other options like striking off.
3. Appointment of a Liquidator – Engage a professional insolvency practitioner, such as Umbrella.UK Insolvency, to manage the MVL process.
4. Settlement of Debts – Ensure all company debts are paid in full.
5. Distribution of Assets – Distribute the remaining funds to shareholders as a capital distribution.

Tom Fox emphasises the importance of professional advice: “Working with experienced insolvency practitioners ensures that the MVL process is handled smoothly, providing peace of mind and financial efficiency for limited company owners.”

Conclusion

For limited company contractors caught by IR35, closing a company can be daunting, but an MVL offers a structured, tax-efficient solution. By choosing an MVL, limited company contractors can ensure that their companies are wound up formally, all creditors are satisfied, and the remaining funds are distributed in the most advantageous manner.

If you are a contractor or an owner of a limited company looking to close your business efficiently, Umbrella.UK Insolvency is here to help. We offer a free initial consultation * to discuss your options and guide you through the MVL process.

Reach out to us today to learn more about how we can assist you in achieving a smooth and tax-efficient company closure.

* We don’t charge for an initial consultation, but it may lead to an insolvency solution where our pre-appointment costs are reimbursed as part of the fee structure that creditors approve.

IR35 limited company and contractors and IR35