Reply to: Tax Efficient Way to close Ltd

[Maslins]

I'm inclined to think that the private sector will find a sensible way to minimise damage of the IR35 changes. Basically with end clients more carefully considering things their end to ensure working practices are outside IR35, with their lawyers/insurers helping to provide comfort for them.

Therefore I'm not anticipating any huge temporary upturn in MVLs specifically in ~16 months time. However sort of in line with Hobosapien's comments, I do think a combination of IR35 changes, MTD, Brexit, and the general "anti contractor" vibe that seems to be coming from the Tories (with Labour unlikely to be more lenient if they were to gain power), I can imagine many people thinking it's not worth it anymore.

Also reality is whilst of course a fairly large number of contractors will have a large war chest for a variety of reasons, in our (Maslins) experience the majority of contractors do clear out their profits consistently, so an MVL would never be of interest.

With TAAR, I do wonder if in the situation jamesbrown suggests, whether a judge might rule in favour of the client. Ie contractor closes company, can demonstrate reason is their client basically says "Post April 2020 we're nervous of new rules so we'll treat you as inside IR35", contractor goes umbrella, then 6 months later private sector relaxes things. Ie whilst tax might still be a key motivator, there would definitely be an argument that they were pushed by circumstances they didn't control.

Only time will tell. Great to have that certainty everyone wants for smooth running of a business!

[jamesbrown]

Re: the part I've highlighted in bold: why do you think this will be the case?

Right, agreed. On your question above, the private sector rollout of the public sector rules on IR35 will undoubtedly create a demand for MvLs, as some fraction will switch to umbrellas, while others will leave contracting altogether. I don’t know what that fraction is. Some fraction of that fraction will then make bad decisions. The most obvious one will be that they initially move to an umbrella and then subsequently pursue an outside contract, within a few months of their last distribution (or even before), using another company. But there will be borderline cases too, and HMRC will begin to look at those when the exchequer risk begins to emerge in a more public way, perhaps in several years. You simply cannot trust their current reading of the TAAR, in my view.

But if you know what you’re doing and there are legitimate reasons, documented, you should be fine. I am not talking about that fraction of people.

[JohntheBike]

Working inside IR35

Working inside of IR35 after working outside, would only be beneficial if the remuneration were roughly the same. I guess the issue is that for anyone moving from outside IR35 to inside, this is unlikely to be the case.

[Hobosapien]

I think I am amongst those pessimistically predicting a rise in MvL, ER, and any other acronym one has relating to closing their Ltd and accepting defeat in the face of IR35. Got another one, AYSUACOTBAC. I think that's the one that NorthernLaddy and co use when they see a weakening of contractor resolve.

Along with the more onerous accounting and business rules already and likely to affect Ltds in the coming months/years (divi tax and associated relief reduction, making tax digital, clampdown on expenses and 5% buffer zone if inside IR35, potential impact on ER and pre-tax pension contributions, and those are just off top of my head ) it's is highly likely that many will 'do the math' (sic) and figure that the diminishing advantage of operating via Ltd will barely offset the stress and hassle of battling to remain outside IR35 and forever looking over ones shoulder for the HMRC bogeyman, instead choosing to operate inside IR35 as default unless client makes the determination and cannot change it mid or post contract and HMRC don't look to overturn client determinations upon investigation.

To back up my 'gut feeling' I'm also in the process of closing my Ltd having not used it for over a year (been using a brolly) and will only entertain opening another one if it makes sense not only financially but based on the potential stress and hassle of how IR35 looks in public and private sector in the coming years and beyond.

Anyone feeling the same may do well to weigh up their own options and decide what is best for them in terms of persevering with a Ltd, which to a large part will depend on the type of contracts they do and the roles they play for the client as to how much of a grey area they are in regards to being caught in or out of IR35.

Alternatively put it on hold (go dormant with Ltd if necessary) until it's known what is happening with IR35 in private sector and hope by then there isn't already a big queue of PSCs closing and looking for an ER judgement from HMRC.

Good luck with whatever course of action you choose and remember ... contracting inside IR35 is still better than being a full permie with all the employee business practices such as performance reviews that clients like to use on their staff and we as contractors will remain exempt from.

[ChimpMaster]

I tend to agree with your voice of doom, although it could play out in several different ways (with different implications for those claiming in future vs. now), such as further tightening of the TiS rules or ER w/r to qualifying criteria or changing the informal advice offered previously about the TAAR. Etc.

The TAAR does leave some room for interpretation and unexpected outcomes, and for those who currently believe they're safe to be not safe.

There will surely be many more people seeking an MvL and making bad decisions in relation to that over the coming years.

"Open to interpretation" is exactly the open ground HMRC aim for. It's non-committal. It allows HMRC to bend the rules and change the application of the law as it suits their needs at whatever time they choose.

Benjamin Franklin was so wrong when he wrote “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Tax is no longer certain.

Re: the part I've highlighted in bold: why do you think this will be the case?

[jamesbrown]

At risk of being deemed a doom sayer

I tend to agree with your voice of doom, although it could play out in several different ways (with different implications for those claiming in future vs. now), such as further tightening of the TiS rules or ER w/r to qualifying criteria or changing the informal advice offered previously about the TAAR. Etc.

The TAAR does leave some room for interpretation and unexpected outcomes, and for those who currently believe they're safe to be not safe.

There will surely be many more people seeking an MvL and making bad decisions in relation to that over the coming years.

[ChimpMaster]

At risk of being deemed a doom sayer and hopefully avoiding being a Cassandra, please, please be careful.

HMRC has seen the fact that PSCs will be closed in huge numbers and that ER will be a major tax relief being claimed over the next 12 to 36 months.

We have already seen restrictions and conditions being imposed that go beyond the original brief and terms of reference.

I cannot for a moment think that HMRC will be waving through claims when they see just how much they could collect.

Do not rely upon a friend or a man down the pub or indeed a bookkeeper. None of them are tax professionals.

Get proper advice.

Hi G

Why will there be PSCs closing in huge numbers in particular over the next 12 - 36 months? Is this related to contractors leaving the business due to the new IR35 Private sector rules?

What restrictions are you referring to?

[craigy1874]

Thanks for the many replies for some reason I was no longer getting notifications about updates to this thread and decided to browse directly just in case. I just want to draw a line with this company and start again with a new accountant and create a new ltd to include my wife.

So it seems what my accountant wants to do is normal ....

accountant has said the process is I need 3 months of trading free before closure so they will extend my end of year by 3 months to end of Feb and it will be advertised in the standard just in case any creditors including HMRC want to make a claim. Anything remaining in account I will have to take as dividends, no other tax efficient method to extract.

Seems overkill, friend of mine said he just didn't file any 1st year accounts and he was struck off anyway .... is this legal or possible ? Or any other method ? Or my accountant knows what they are doing.

Why do accountants keep on recommending this 'extend the accounting period by 3 months' nonsense?

Jesus man it's not difficult!

[webberg]

At risk of being deemed a doom sayer and hopefully avoiding being a Cassandra, please, please be careful.

HMRC has seen the fact that PSCs will be closed in huge numbers and that ER will be a major tax relief being claimed over the next 12 to 36 months.

We have already seen restrictions and conditions being imposed that go beyond the original brief and terms of reference.

I cannot for a moment think that HMRC will be waving through claims when they see just how much they could collect.

Do not rely upon a friend or a man down the pub or indeed a bookkeeper. None of them are tax professionals.

Get proper advice.

[WTFH]

Well he listened to his accountant, the professional he was paying ....

A few questions:
1. Did your friend close his company recently?
2. Has he had an accountant complete any of his personal tax returns since closing it down?
3. Was his company set up in the same way yours was?
4. Did he have roughly the same amount of money in his company when he closed it?

[RajaStyle]

So who would you rather listen to. Your friend or the qualified professional you are paying?

Well he listened to his accountant, the professional he was paying ....

[northernladuk]

Thanks for the many replies for some reason I was no longer getting notifications about updates to this thread and decided to browse directly just in case. I just want to draw a line with this company and start again with a new accountant and create a new ltd to include my wife.

So it seems what my accountant wants to do is normal ....

accountant has said the process is I need 3 months of trading free before closure so they will extend my end of year by 3 months to end of Feb and it will be advertised in the standard just in case any creditors including HMRC want to make a claim. Anything remaining in account I will have to take as dividends, no other tax efficient method to extract.

Seems overkill, friend of mine said he just didn't file any 1st year accounts and he was struck off anyway .... is this legal or possible ? Or any other method ? Or my accountant knows what they are doing.

So who would you rather listen to. Your friend or the qualified professional you are paying?

[RajaStyle]

You can't apply to strike off the company until it has ceased trading for 3 months. There is absolutely no requirement to extend the accounting period by 3 months to do this.

Some accountants can come up with weird and wonderful things!

Thanks for the many replies for some reason I was no longer getting notifications about updates to this thread and decided to browse directly just in case. I just want to draw a line with this company and start again with a new accountant and create a new ltd to include my wife.

So it seems what my accountant wants to do is normal ....

accountant has said the process is I need 3 months of trading free before closure so they will extend my end of year by 3 months to end of Feb and it will be advertised in the standard just in case any creditors including HMRC want to make a claim. Anything remaining in account I will have to take as dividends, no other tax efficient method to extract.

Seems overkill, friend of mine said he just didn't file any 1st year accounts and he was struck off anyway .... is this legal or possible ? Or any other method ? Or my accountant knows what they are doing.

[WordIsBond]

You would probably be caught by this condition as would New Modeller Army who said they would go brolly permanently, assuming the trade is similar or the same then condition C would apply. However, condition D would still need to be satisfied in order for the rules to apply. Assuming that closing down the company to go brolly permanently is not a decision made to obtain a tax advantage, along with being viewed as employee, you should be fine.

IMO this pretty much nailed it.

You might be argued to be in the same trade, but it is pretty easy to argue, if you've become an employee (brolly or permie) that you haven't closed the company to gain a tax advantage. You've closed the company because you don't need it any longer.

It's true that it hasn't tested yet, and it is unlikely to ever be tested, because HMRC is pretty unlikely to ever challenge someone in this situation.

[Craig@Clarity]

The wording is:
The individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound-up company at any time within two years from the date of the distribution.

How can doing the same thing in a brolly not be considered to be involved in the same trade!!!

I would be grateful if anyone could provide a definitive answer on this, as the brolly route is something that I would consider ...but always assumed I would be caught by the above condition.

You would probably be caught by this condition as would New Modeller Army who said they would go brolly permanently, assuming the trade is similar or the same then condition C would apply. However, condition D would still need to be satisfied in order for the rules to apply. Assuming that closing down the company to go brolly permanently is not a decision made to obtain a tax advantage, along with being viewed as employee, you should be fine.

However, as others have mentioned there is no definitive answer at this point except for a few examples. CIOT did offer HMRC 18 examples for their guidance, none of which were adopted during consultation. Interestingly, in one of their examples, it mentions a recruitment consultant trained for 3 years, closed down her company, started a new one and began trading as an IT consultant. This is not considered similar or same trade to them and therefore the rules wouldn't apply.