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What next for limited companies operated by public sector contractors?

Accountants are preparing for a fresh wave of limited company closures in early April when the long-dreaded IR35 reforms for Public Sector Contractors take effect.

From 6th April 2017, the way that IR35 legislation is applied in the public sector is changing. Instead of the contractor determining their own IR35 status, the end-user (public sector body) or an agency will decide it for them.

As the end-user or agency will become liable if they make the wrong determination, it is thought that they are more likely to take a risk-averse approach and decide to apply IR35 and in effect the contractor will be paid as if they were an employee, either through the end-user’s or the agency’s payroll, or alternatively paid via an umbrella company who would be responsible for making the necessary tax deductions.

This will result in a lot more public sector contractors being caught out by IR35. And for some workers, that can mean a 30% reduction in take-home pay.

Before acting, it is important that contractors understand how the changes will impact them. HMRC’s employment status indicator is a good place to start (this is still in a beta stage and not totally accurate).

It is also a good idea for the contractor to speak to the public sector body or the organisation engaging them to find out what their plans are.

Ceased to trade come April 2017?

It is predicted that the vast majority of limited companies operating in this sector will cease to trade.

What options are now available to the contractor who is in effect being employed by an unconnected third party?

If the company is solvent (i.e. has sufficient assets to pay its creditors) then a Members’ Voluntary Liquidation (MVL) may be appropriate with the contractor receiving the surplus funds from the Liquidator as a capital distribution which should be subject to capital gains tax rules and not income tax rules.

The contractor may also qualify for Entrepreneur’s Relief which effectively results in a capital gains tax bill at a flat rate of 10%.

The contractor should always take independent advice from a qualified tax adviser.

For limited companies that are insolvent (i.e. has insufficient assets to pay its debts) one option available is to initiate a Creditor’s Voluntary Liquidation (CVL) process. Company shareholders will need to appoint a Licensed Insolvency Practitioner to liquidate the company’s assets for the benefit of its creditors.

The Liquidator will manage all of the company’s affairs including communicating with its creditors.

Why choose Umbrella?

Wilmslow based Umbrella can help out contractors by ensuring that they are IR35 compliant and allow them to benefit from a better ‘take home pay’ under the new rules. By registering with Umbrella’s payroll service, the contractor can also enjoy full employment rights and all tax and national insurance payments are handled by us.

Umbrella’s in-house insolvency team are also qualified and experienced to handle formal insolvency procedures including MVL’s and CVL’s. With director led involvement on all cases, clients can benefit from high standards of service.

For more information or advice please contact a member of the Umbrella Insolvency team on 0800 611 8888.