Reply to: [Hypothetical question] Caught in IR35 and closing down business

[jamesbrown]

I can't say it'll never happen, but seems to me any fears that closing your company will immediately lead to the IR35 inspectors swooping in seem unfounded.

Yeah, I think that much is clear, otherwise we would've heard about it The point is that closing a company isn't an "anti-IR35 strategy" and it also offers HMRC a decision point. Any additional risk needs to be placed in the context of the overall risk of investigation, which is vanishingly small. The bigger risk is having ER denied retrospectively because it wasn't available (e.g. the contractor had every intention of continuing their trade). Lack of case law doesn't mean lack of risk on the latter, I think you'd agree.

[eek]

We hear a lot of people concerned about this...but in >300 MVL Online cases to date, not once have we seen HMRC raise an enquiry, IR35 or otherwise (I'd say 50-75% of our clients are ex contractors, not always clear cut).

I can't say it'll never happen, but seems to me any fears that closing your company will immediately lead to the IR35 inspectors swooping in seem unfounded.

I doubt HMRC are that joined up yet....

[Maslins]

Again, the bottom line is that closing your company provides no form of immunity and, if anything, could be the trigger point for an investigation.

We hear a lot of people concerned about this...but in >300 MVL Online cases to date, not once have we seen HMRC raise an enquiry, IR35 or otherwise (I'd say 50-75% of our clients are ex contractors, not always clear cut).

I can't say it'll never happen, but seems to me any fears that closing your company will immediately lead to the IR35 inspectors swooping in seem unfounded.

[cojak]

Hope our web content was useful.

Yes, thank you too Jessica.

[Jessica@WhiteFieldTax]

Ah, right you are. That was a nicety that I wasn't aware of.

Thanks to you both James and Blaster, I'm better informed now.

Hope our web content was useful.

[Jessica@WhiteFieldTax]

Ignoring any aspects around ER on payment it seems to me that one would be in a very strong position there.

If HMRC do not object to the closedown then they are accepting the cos taxation position. It would be unreasonable if they were able to go straight to the employee because the company had been liquidated. They surely have to firstly establish the debt against the company before it can be transferred to the individual. That involves restoration in the first instance.

However there are risks. A post from AccountingWeb (some time ago). Can HMRC demand tax from a Company that has already been wound up? | AccountingWEB

"We have a situation where we wound a company up using ESC C16, with HMRC giving their approval of this. Some time later HMRC issued an enquiry notice into the company's CT600. We told HMRC that the company had been wound up, so they could not enquire. They replied, agreeing that they could not enquire (they hadn't checked that the company had been struck off, prior to raising their enquiry notice!), but they are now trying to use Schedule 36 Finance Act 2008 powers to give them access to the company's accounting records for the year in question. HMRC are of the opinion that, under ESC C16, the directors and shareholders agree to pay the company's tax liabilities, and that includes potential liabilities that may come out of the woodwork. As far as I know, the client has nothing to hide, so there will be no further tax liabilities. We are just trying to avoid the time and hassle of dealing with this HMRC pointless request, but unfortunately HMRC don't want to take the practical view and back off."

If HMRC were not informed of the striking off then that would weaken things.

However, provided everything has been done properly I believe you should be as safe as is possible.

Thats a new interpretation on Esc C16, possibly one HMRC officer freelancing. Its not common practice to use the ESC C16 declaration as a lever to re-open a closed company.

In any event with the new statutory enactment of ESC C16 - sorry haven't got statute to hand as I type - the declaration doesn't have to be made so its academic. You either have a statutory right to take less than £25k on strike off as capital or, if over £25k, you need a MVL or suffer the tax as a dividend.

[eek]

However there are risks. A post from AccountingWeb (some time ago). Can HMRC demand tax from a Company that has already been wound up? | AccountingWEB

I can see why HMRC were annoyed. He applied to pay PAYE after making a request to strike the company off....

[ASB]

Ive closed my last 4 companies down after 3 or 4 years as part of an 'anti' IR35 strategy with my accountants. Yes, it does alert hmrc to the fact you're closing the company and gives them chance to investigate. Todate, I havent had any problem.

And, seeing as I have contract reviews etc as mentioned here, https://www.whitefieldtax.co.uk/web/...-a-individual/

the accountants are quite confident hmrc would have a hard time coming after me personally re IR35.

Ignoring any aspects around ER on payment it seems to me that one would be in a very strong position there.

If HMRC do not object to the closedown then they are accepting the cos taxation position. It would be unreasonable if they were able to go straight to the employee because the company had been liquidated. They surely have to firstly establish the debt against the company before it can be transferred to the individual. That involves restoration in the first instance.

However there are risks. A post from AccountingWeb (some time ago). http://www.accountingweb.co.uk/anyan...ady-been-wound

"We have a situation where we wound a company up using ESC C16, with HMRC giving their approval of this. Some time later HMRC issued an enquiry notice into the company's CT600. We told HMRC that the company had been wound up, so they could not enquire. They replied, agreeing that they could not enquire (they hadn't checked that the company had been struck off, prior to raising their enquiry notice!), but they are now trying to use Schedule 36 Finance Act 2008 powers to give them access to the company's accounting records for the year in question. HMRC are of the opinion that, under ESC C16, the directors and shareholders agree to pay the company's tax liabilities, and that includes potential liabilities that may come out of the woodwork. As far as I know, the client has nothing to hide, so there will be no further tax liabilities. We are just trying to avoid the time and hassle of dealing with this HMRC pointless request, but unfortunately HMRC don't want to take the practical view and back off."

If HMRC were not informed of the striking off then that would weaken things.

However, provided everything has been done properly I believe you should be as safe as is possible.

[jamesbrown]

Ive closed my last 4 companies down after 3 or 4 years as part of an 'anti' IR35 strategy with my accountants. Yes, it does alert hmrc to the fact you're closing the company and gives them chance to investigate. Todate, I havent had any problem.

And, seeing as I have contract reviews etc as mentioned here, https://www.whitefieldtax.co.uk/web/...-a-individual/

the accountants are quite confident hmrc would have a hard time coming after me personally re IR35.

Sounds like you're receiving some very dodgy advice if that's what they told you (i.e. an "anti IR35 strategy"). This isn't one of the big contractor accountants, is it? That said, IR35 may not be your biggest problem. Did you claim ER each time?

[BolshieBastard]

First, I completely agree with the thrust of what you're saying. Closing the company doesn't in any way eliminate the problem, and HMRC needs to give their assent to the company being struck off in the first place (which brings you to their attention). There are different statutory periods for different taxes, and it also depends on whether evasion is involved, but the bottom line is that the longest of these statutory periods is very long indeed (20 years).

However, strictly speaking, IR35 is a company liability because it's the responsibility of the company to handle its tax affairs properly, including for all employees and office holders. The hypothetical contract is only there as a test, i.e. to "look through" the corporate structure, but that doesn't, in any way, remove the responsibilities from the company to handle its tax affairs properly. Now, in the event that the company director has acted without due care and attention (e.g. failed to have the proper contract reviews), it's possible that the company debt could be transferred to a personal debt on the director, but there's quite a high bar for that. AFAIK, there's no case law whereby a company has been closed and forcibly reinstated following investigation (that would be extremely messy, and it's unclear what would happen - dividends declared 'ultra vires' etc.).

Again, the bottom line is that closing your company provides no form of immunity and, if anything, could be the trigger point for an investigation.

Ive closed my last 4 companies down after 3 or 4 years as part of an 'anti' IR35 strategy with my accountants. Yes, it does alert hmrc to the fact you're closing the company and gives them chance to investigate. Todate, I havent had any problem.

And, seeing as I have contract reviews etc as mentioned here, https://www.whitefieldtax.co.uk/web/...-a-individual/

the accountants are quite confident hmrc would have a hard time coming after me personally re IR35.

[cojak]

Ah, right you are. That was a nicety that I wasn't aware of.

Thanks to you both James and Blaster, I'm better informed now.

[jamesbrown]

This is discussed here:

https://www.whitefieldtax.co.uk/web/...-a-individual/

Yes, that's an excellent overview. In terms of case law, it's worth noting Prowse & Anor vs. HMRC as a reference point on the difficulty of transferring liability.

[BlasterBates]

This is discussed here:

https://www.whitefieldtax.co.uk/web/...-a-individual/

[jamesbrown]

Read up on IR35 again because you have misunderstood it.

IR35 has nothing to do with a Ltd company, it is to do with your personal tax.

So you can close your Ltd company and they can still come after you for the tax up to SIX years after you earned it.

First, I completely agree with the thrust of what you're saying. Closing the company doesn't in any way eliminate the problem, and HMRC needs to give their assent to the company being struck off in the first place (which brings you to their attention). There are different statutory periods for different taxes, and it also depends on whether evasion is involved, but the bottom line is that the longest of these statutory periods is very long indeed (20 years).

However, strictly speaking, IR35 is a company liability because it's the responsibility of the company to handle its tax affairs properly, including for all employees and office holders. The hypothetical contract is only there as a test, i.e. to "look through" the corporate structure, but that doesn't, in any way, remove the responsibilities from the company to handle its tax affairs properly. Now, in the event that the company director has acted without due care and attention (e.g. failed to have the proper contract reviews), it's possible that the company debt could be transferred to a personal debt on the director, but there's quite a high bar for that. AFAIK, there's no case law whereby a company has been closed and forcibly reinstated following investigation (that would be extremely messy, and it's unclear what would happen - dividends declared 'ultra vires' etc.).

Again, the bottom line is that closing your company provides no form of immunity and, if anything, could be the trigger point for an investigation.

[cojak]

PS - I have no idea what you mean about freelancing vs contracting...