Reply to: To close the company down or not?

[Maslins]

I have one minor reservation on jumping in to close downs; to me it can make things look more like disguised employment if the company is closed down immediately a contract ends.

If we consider a non-contractor business. Their sole/main income stream has just disappeared, they're moving on to do other things, and have no intention of continuing the trade. Why wouldn't they close down immediately after the income ceased? I don't see why a contractor would be any different.

I appreciate the "no intention of continuing the trade" is the sometimes grey one for contractors, as they're perhaps more likely than other businesses to cease, take on a PAYE role/similar, then start trading again doing something very similar relatively soon after (ie months/low number of years)...but if we're simply talking about time between ceasing and closing in isolation, I don't see any difference between contractors and other businesses, and therefore don't see any reason why closing very soon after ceasing is in any way contentious. As above, I think for practical reasons it can make sense to delay, eg not being kept on following probation at a permie role.

As an aside, transactions in securities (TiS) is something that if it were to bite would materialise following personal tax returns, and it'd be those distributions which could theoretically be challenged. However, wouldn't any risk along the IR35 lines bite the company, and therefore be challenged during close down? To date, with ~250 liquidations under our belt, MVLO haven't seen a single hold up relating to IR35 enquiries.

My point being, I'm still modestly cautious about TiS as that could bite further down the line, but I've seen zero evidence of closure prompting IR35 questions.

[Jessica@WhiteFieldTax]

It could be used as an indicator but an unreliable one I'd imagine as there are many reasons why one might close down, and besides, they'd only have sight of your contracts if they chose to investigate you to begin with. I would think they'd rather focus their limited resources on pursuing artificial closures and subsequent incorporations.

Also, if they were efficient you could argue they'd spend their resources on more lucrative avenues than IR35 to begin with, and I suspect the FLCs are an attempt to do just that.

The rational side of me quite agrees ZL, the irrational side worries.

[Zero Liability]

I have one minor reservation on jumping in to close downs; to me it can make things look more like disguised employment if the company is closed down immediately a contract ends.

That said its gut feel only, and not backed up by anything in the trinity of status tests. If HMRC were efficient it may be a trigger to them; From experience I don't think it currently is.

It could be used as an indicator but an unreliable one I'd imagine as there are many reasons why one might close down, and besides, they'd only have sight of your contracts if they chose to investigate you to begin with. I would think they'd rather focus their limited resources on pursuing artificial closures and subsequent incorporations.

Also, if they were efficient you could argue they'd spend their resources on more lucrative avenues than IR35 to begin with, and I suspect the FLCs are an attempt to do just that.

[TheFaQQer]

What I meant was a contractor may use the same company for many contracts over many years and close the company down at the end of the final contract. Whereas there are some contractors who only use their company for a single contract then close the company down at the end of it.

Hopefully the latter lot don't claim travel and subsistence to their permanent place of work...

[Forbes Young]

I've never heard of any, that would mean some would have about 4 company startups a year!

What I meant was a contractor may use the same company for many contracts over many years and close the company down at the end of the final contract. Whereas there are some contractors who only use their company for a single contract then close the company down at the end of it.

[stek]

In my experience most contractors close down their company when a contract ends - but of course some of them have multiple contracts over many years and some only have one contract throughout the lifetime of the company.

I've never heard of any, that would mean some would have about 4 company startups a year!

[Jessica@WhiteFieldTax]

In my experience most contractors close down their company when a contract ends - but of course some of them have multiple contracts over many years and some only have one contract throughout the lifetime of the company. HMRC would need a considerable workforce/resources to analyse the thousands of contractors who close down their company each year, so I wouldn't let this dissuade you. The strength of the contract(s)/how you operate the contract(s) in the workplace from an IR35 viewpoint is far more important in my view.

Res ipsa loquitur, I think.

[Forbes Young]

I have one minor reservation on jumping in to close downs; to me it can make things look more like disguised employment if the company is closed down immediately a contract ends.

That said its gut feel only, and not backed up by anything in the trinity of status tests. If HMRC were efficient it may be a trigger to them; From experience I don't think it currently is.

In my experience most contractors close down their company when a contract ends - but of course some of them have multiple contracts over many years and some only have one contract throughout the lifetime of the company. HMRC would need a considerable workforce/resources to analyse the thousands of contractors who close down their company each year, so I wouldn't let this dissuade you. The strength of the contract(s)/how you operate the contract(s) in the workplace from an IR35 viewpoint is far more important in my view.

[Jessica@WhiteFieldTax]

I have one minor reservation on jumping in to close downs; to me it can make things look more like disguised employment if the company is closed down immediately a contract ends.

That said its gut feel only, and not backed up by anything in the trinity of status tests. If HMRC were efficient it may be a trigger to them; From experience I don't think it currently is.

[Eirikur]

As a minimum leave it open until your probation time has passed

[SarahL2012]

I've just been through this thought process & decided to close it down.

Definitely leave it a couple of months though. My permanent job offer was pulled a week before I was due to start so I'm back in the interim market again.

[Maslins]

If you are unsure about returning to contracting its probably best to close down your company in my view - you can always form a new one if you decide to return. If you have been trading for a year you may well be able to claim 10% Entrepreneurs Relief on the final distribution you draw from your company. If the amount exceeds £25k you will have to go down the route of MVL (Members Voluntary Liquidation). Although fees for the latter may be a few £000 the amount of tax saved should make it worthwhile.

If you continue your company in a dormant state (and pay accountancy fees) your company will still need to file dormant accounts and various other returns (although you could de-register for VAT) and as a director you would still need to file a self-assessment return.

This.

To my mind "dormant" is something a bit misunderstood by the contractor market. If you stop contracting for a few months, your company isn't dormant, and negligibly less admin has to be done. Realistically your company needs to do literally nothing for an entire accounting year for it to benefit from any of the reduced admin of dormancy.

I'd suggest close it down, but as Louise says, probably a good idea to leave it until you're a couple of months into the PAYE role, in case either you hate it, or they don't keep you on beyond probation.

Consider whether you might want to make a hefty pension contribution. For some drip feeding dividends over a few tax years can be a good option, but mainly for those taking early retirement, not those going into a high salary job.

Alternatively, if you want the cash now, normally best to pay it out as part of the close down. If <£25k, a cheap and cheerful strike off should suffice. If >£25k you'd need a members voluntary liquidation to obtain the CGT treatment. Sister company of ours MVL Online does these for just under £1k+disbursements+VAT provided you meet their criteria, so they're not as expensive as they used to be...but still way more expensive than a £10 cheque to Companies House for strike off.

[Louisa@InTouch]

If you are not going to use your company again in the future, then close the business. I would usually advise giving it a couple of months at least before making the final decision.

This will save you closing the company then deciding you want to go back to contracting, having to incorporate another company, go through VAT and PAYE registrations, etc. Plus there are likely to be costs for closing your current company and then opening another.

As for being tax efficient and how to distribute your profits. There are many factors that will need to be considered. But go through them with your accountant and they will be able to assist you.

[TheFaQQer]

Hi all,

I have recently became permanent since the perks were too good to turn down. I am planning to stay in the role for about a year.
1) What is most cost effective and tax effective for me to do?
2) Shall I close my limited company down and withdraw all the funds?
3) Shall I stop my accountant?
4) Shall I make my company dormant and then use my accountant, just for the last VAT return?

Many thanks all!

Shut it down, take the entrepreneurs relief, and load up on coke and hookers (advice on the latter can be found in this thread)

Seriously, if you aren't sure whether you are going to come back to contracting, then I would take the money at the lower rate of tax while you can, and then come back if you want to in the future. Given that you've moved into a permanent role, it would be hard for HMRC to argue that it was an artificial move, and who knows whether any government will remove the benefit at any stage?

[Forbes Young]

Hi all,

I have recently became permanent since the perks were too good to turn down. I am planning to stay in the role for about a year.
1) What is most cost effective and tax effective for me to do?
2) Shall I close my limited company down and withdraw all the funds?
3) Shall I stop my accountant?
4) Shall I make my company dormant and then use my accountant, just for the last VAT return?

Many thanks all!

If you are unsure about returning to contracting its probably best to close down your company in my view - you can always form a new one if you decide to return. If you have been trading for a year you may well be able to claim 10% Entrepreneurs Relief on the final distribution you draw from your company. If the amount exceeds £25k you will have to go down the route of MVL (Members Voluntary Liquidation). Although fees for the latter may be a few £000 the amount of tax saved should make it worthwhile.

If you continue your company in a dormant state (and pay accountancy fees) your company will still need to file dormant accounts and various other returns (although you could de-register for VAT) and as a director you would still need to file a self-assessment return.

Its best in my opinion to discuss the options, together with relevant costs, with your accountant as they should be able to give you specific advice relevant to your specific circumstances.