Understanding IR35 and what to do if you need to close your company

How do you close down a company due to IR35?

Sweeping changes HMRC made to IR35 legislation in 2021 to reduce tax avoidance have adversely affected many contractors and left them with little choice but to close their companies. 

Rather than your limited company deciding whether a contract is inside out or outside IR35, the responsibility for determining its IR35 status now usually rests with the end client. If your IR35 status has changed or your relationship with an end client puts you at risk of an HMRC investigation, closing your contractor company could be the right approach.

If you want to close your UK contractor company, there are various methods you can use based on its retained profits and financial status. Here we discuss your options and provide expert guidance to help you close it in the right way.

I can’t trade my company due to IR35 changes - what should I do?

The IR35 changes were introduced to prevent contractors from reducing their tax liability when they were fulfilling the same duties and working in the same way as a company employee. 

If you are now deemed to be inside IR35 by your end client, the increased tax liability may mean you need to re-negotiate your remuneration to fill that payment gap. However, if you are unsuccessful, you may have little choice but to close your limited company and find an alternative way to operate.

How can I close my IR35 contractor company?

The most appropriate closure method for your IR35 contractor company depends on the level of retained profits and its financial status. 

Company dissolution

If your company is solvent (can repay all its debts) and has less than £25,000 in retained profits, the easiest and most cost-effective way to close it down is usually via Voluntary Dissolution. This is a process you can do yourself by completing form DS01. It costs £33 to apply online or £44 for a paper application.

Before submitting the form, you’ll need to prepare the company for closure by paying any creditors, transferring assets away from the business, filing company accounts, informing HMRC and closing the business’s bank accounts. You can then apply, and as long as there are no objections, the company will be dissolved after three months. 

Members’ Voluntary Liquidation (MVL)

If your company is solvent and has assets and retained profits worth £25,000 or more, a formal process called a Members’ Voluntary Liquidation will likely be the most cost-effective way to close it down. 

In an MVL, all the money you take out of the business is taxed as capital rather than income. If you are eligible for Business Asset Disposal Relief, you’ll pay just 10% Capital Gains Tax on qualifying gains. If you were to close it via Voluntary Dissolution, anything over £25,000 is taxed as income. 

To initiate the process, you must appoint a licensed Insolvency Practitioner to act as the liquidator. They will realise the assets, repay any creditors and distribute the proceeds among the shareholders. Finally, they’ll remove the company from the official register and it will cease to exist.  

Creditors’ Voluntary Liquidation (CVL)

If your company is insolvent (cannot pay its debts when they’re due) due to the IR35 changes, you must use a different voluntary liquidation procedure to close it down. 

You can initiate a Creditors’ Voluntary Liquidation by appointing an Insolvency Practitioner to liquidate the company on your behalf. In this case, they’ll sell the business’s assets and use the proceeds to repay your creditors as much as possible. Any remaining debts will be written off and the company will be struck off the register. 

A key benefit of a CVL is that IR35 contractors who have worked as an employee of their company for at least two years could be eligible for director redundancy pay. Director redundancy claims in the UK currently average around £9,000.

The importance of closing your contractor company in the right way

There are complex rules surrounding IR35 contractor companies and their closure. Seeking professional advice can ensure you choose the most appropriate closure method and prevent legal issues from emerging in the future. 

For example, if your contractor company is insolvent, you must follow insolvency laws and take steps to protect the interests of your creditors. If you don’t, you could be held personally liable for the company’s debts or even be disqualified from acting as a director for up to 15 years. 

At Begbies Traynor, we provide a free consultation to discuss your options and explain the potential ramifications. We can then guide you through the most appropriate solution. Contact our team or arrange a meeting at one of our UK-wide offices.