Contractor Companies being made redundant: Do you know what to recommend?

At present, the Finance Bill 2019-20 includes a key change for those who provide services through an intermediary (usually a limited company) in the private sector.  From 6 April 2020 it is intended that it will be the responsibility of the end-client to determine whether these people should be classified as contractors (as now), or whether they should be employees.  These end-users, not the contractor, will be made liable for the employment taxes if found to have chosen the wrong status.

Previously, HMRC were able to determine using ‘IR35’ whether a contractor was in fact an employee in all but name and would claim additional PAYE and national insurance from these people if they deemed it due.  In practice, however, these cases were hard for HMRC to spot, let alone prove, and the legislation was largely ineffective.  The changes – pushing the onus, and penalties, on to the end-user, is copying changes made in the public sector a couple of years ago, which appear to have been more effective in increasing HMRC’s tax yield from these workers.

Though all could change following the election, we are already seeing contractors who previously worked through service companies being moved on to permanent employment contracts, and many more are surely anticipating being transferred prior to 6 April 2020.  That will leave their service companies redundant.

Nearly all accountants I have spoken with have clients in this position, but many do not know what to recommend their clients to do with their companies.  In most cases, their best option will be to place the company into members’ voluntary liquidation (‘MVL’), a solvent liquidation through which all final tax matters for the company are resolved, and all remaining funds in the company are distributed to the shareholder (ie the contractor) as capital distributions.  These funds are then taxed as capital distributions, and in many cases the contractor will be able to claim entrepreneur’s relief on their distributions, paying 10% tax.

At WSM Marks Bloom we have three licensed insolvency practitioners able to assist with the MVL process and ensure your company is placed into liquidation and receive your funds as quickly as you need them.  Call 020 8939 8240 or email insolvency@wsm.co.uk to contact one of our experts.