Advice For Contractors Closing Down Their Contracting Company


IR35 has been around for twenty years. Originally announced in a titular release by the former Inland Revenue it has been a contentious tax legislation from day one.

However, it has hit the headlines more and more since 2017 when the new form of the Off-Payroll legislation took effect in the public sector and hirers in the public sector were made responsible for assessing the status of contractors.

These changes caused considerable disruption to public sector contractors, their accountants, recruitment agencies and hiring companies, with each party spending valuable time and resources dealing with the changes and uncertainties surrounding them.

Many contractors who found themselves ‘inside IR35’ faced two options – either become an employee or leave the public sector altogether.  Many chose to leave, and many projects were delayed.

Fast forward two years and contractors have been bracing themselves for the Off-Payroll to hit the private sector, as the Government pressed on with its plans to roll the new tax rules out to medium and large businesses.

Then came Covid-19 and once again those self-employed workers were dealt another blow as the pandemic left many without work overnight, albeit there was some relief as Off-Payroll was paused until April 2021. And let’s not forget Brexit and all the uncertainty around it which is having a huge effect on a lot of businesses in the UK.

It has been a bumpy few months for businesses of all sizes and, despite the emergency measures announced by the Chancellor in an effort to keep the economy afloat, not every contractor will want to carry on trading.

Some will want to retire earlier than they’d previously planned – to get away from all the turmoil and ‘cash in’ all their hard earnings. Others, however, will have seen their income falling to such an extent that they are now having cash flow problems and are unable to pay some of their bills.

Some may be considering taking up a PAYE role for job security, whilst others may be forced to put their retirement plans on hold and continue working until they feel confident that their pension pot will serve them well.

The combined effects of Brexit, Covid-19 and the new Off-Payroll tax have hit businesses hard and some company directors now think that closing down their company is the best course of action for them.

John Bell is a chartered accountant and insolvency practitioner who founded insolvency firm Clarke Bell in 1994.  Here is his advice for contractors who are faced with the decision of closing down their limited companies.

A Members’ Voluntary Liquidation is the best option for contractors

If a contractor is planning on moving into an employee/PAYE role, retiring or pursuing some other life or career plan then a Members’ Voluntary Liquidation (MVL) is likely to be the most tax-efficient way to close a solvent company – particularly if the assets of a company are more than £25,000.

An MVL is an HMRC-approved process and a licensed insolvency practitioner must be appointed. While it may have a negative-sounding ring to it – with terms like ‘liquidation’ and ‘insolvency practitioner’ – there is nothing negative about it.

Quite the opposite, in fact. By placing a company into an MVL it is a clear illustration that someone has been running a successful company.

An MVL allows a contractor to draw any remaining profit as a dividend, paying income tax on the dividend amount.  With the help of a licensed insolvency practitioner who will liquidate a company, the reserves can then be distributed as capital, which are then subject to capital gains tax (CGT) at either 18% or 28%.

Through an MVL, a contractor can also take advantage of Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before 6 April 2020).

If someone qualifies for this relief, this can mean that CGT will be paid at a rate of 10% on qualifying assets, which can translate into considerable tax savings.

Each shareholder of the limited company could also benefit from a tax-free allowance of £11,000, the Annual Exempt Amount.  If there are multiple shareholders, this can be highly efficient.

To ascertain eligibility for Business Asset Disposal Relief / Entrepreneur’s Relief, contractors should speak to an Accountant and also look at the website.

Free and confidential advice is available

Off-Payroll (IR35), Brexit and Covid-19 are all things that are likely to have a huge impact on contractors and their limited companies and most firms of Insolvency Practitioners will offer free and confidential advice.  Navigating the solvent liquidation path can be done smoothly and painlessly.

My advice to contractors is to talk to their accountants now so that they can ensure that they pick the best option for their particular situation.

John Bell is director of insolvency firm Clarke Bell, which he founded in 1994.

John Bell
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