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If you are a contractor planning to close down your solvent limited company (PSC) then depending upon how much cash there is left, using a Members Voluntary Liquidation (MVL) could be the most tax-efficient way and save you thousands of pounds.
Some of the nation’s largest banks are forcing personal service company (PSC) contractors to go on the payroll, a move that will leave many with dormant limited companies. Here’s how to close your PSC tax efficiently if you’re affected by the banking sector contractor ban.
Under reforms to off-payroll working legislation, large organisations will be made responsible for judging a PSC contractor’s IR35 status from April 2020.
To reduce compliance risk, or possibly just to cut down on paper work, major banks including HSBC, Barclays, Lloyds and Tesco Bank have all issued notices warning contractors that they will either need to go on the company payroll or quit.
If you have been affected by these changes, the best way to close down your dormant PSC may be by using a Members Voluntary Liquidation.
Tom Fox, Licensed Insolvency Practitioner at Umbrella Insolvency, says that contractors can make the most of a less-than-ideal situation by winding up their PSC in a tax efficient way.
He said: “Whatever their reasoning, this decision by some of the country’s biggest banks will leave many contractors in a tricky situation. But if contractors do decide to leave the world of flexible working for more traditional employment, then at least the question of how to wind up their PSC should be a more straightforward one.
“A Members Voluntary Liquidation allows company owners to withdraw any leftover cash as capital, which may mean they pay a lower rate of tax.
“Even if the bank you work for has not formally announced plans to block contractors, it is worth considering your options now in case they introduce new policies before April. You may be able to benefit from additional tax advantages if you plan ahead and withdraw money in the right way at the right time.”
What is a Members Voluntary Liquidation (MVL)
A Members Voluntary Liquidation is a process that allows shareholders to close down a solvent company (a company that can pay its debts) and withdraw funds in a tax-efficient way.
If, as a result of changes to IR35, a contractor wishes to enter full-time employment or retire, an MVL may be the best way of closing down their company.
Where the assets of a company exceed £25,000, capital distributions can only be carried out by a liquidator.
Withdrawing money in this way, PSC contractors may also qualify for Entrepreneur’s Relief (ER) and benefit from a 10% marginal rate on distributions. To qualify, conditions include shareholders owning at least 5% of the shares for at least two years prior to the cessation of trade.
Before proceeding with an MVL, you should always ensure that you have taken the appropriate tax advice from your tax adviser.
If your PSC is insolvent (cannot afford to pay its debts) then you may need to pursue a Creditors Voluntary Liquidation (CVL). This is still a voluntary process, but it needs to be carried out by a Licensed Insolvency Practitioner who must act in the best interests of creditors, paying them before shareholders.
The Members Voluntary Liquidation Process
Members Voluntary Liquidations follow a specific process.
- Tax Advice – Director/Shareholder of the PSC (the contractor is both in this case) to take appropriate tax advice from their tax adviser to see if an MVL is suitable.
- Formal Instruction – Umbrella are instructed by the PSC (contractor) to assist in arranging the meetings to place the PSC into MVL and for Umbrella’s IP to be appointed as liquidator.
- Approval – MVL is approved. Umbrella Insolvency proceed to:
- Collect the cash from the PSC business bank account.
- Pay off the creditors including HMRC.
- Pay the surplus funds, after costs, to the contractor.
Acting as your liquidator, Umbrella will make the Members Voluntary Liquidation process as straightforward as possible.
To find out how a Members Voluntary Liquidation could benefit you, speak to a member of the team today. Call: 0800 611 8888 or visit https://www.umbrella.uk/members-voluntary-liquidation-mvl/