Q. I currently don’t have a contract. I’ve just finished a job that lasted 18 months (initially a 6 month rolling contract) and I’m unsure whether I’m going to take on another contract this year. I have £20K within the company and am looking forward to a few months off. I want to know whether or not to close down the company altogether, or keep it open in case I pick up a contract in the future?
Accountant’s Answer: On the basis you have £20K remaining in your Ltd Co after all taxes and other liabilities have been paid I would suggest you keep your Limited Company open and withdraw the remaining funds in a tax efficient manner over a period of time. If not already done so, you could add an additional shareholder in order to fully utilise both shareholders’ tax free dividend allowances.
During the period of inactivity your accountancy fees should reduce considerably. In addition, you will not need to de-register for business taxes, only to then have the administrative burden of incorporating a new company and having to re-register for all taxes again, should you win another contract.
Most importantly, based on the figures involved you can structure your salary and dividend strategy such that you would incur little to no tax liability by withdrawing the remaining funds as salary and dividends over the period of time with no trading activity.
Should you wish to close your Limited Company using a tax efficient vehicle i.e. entrepreneurs relief, you cannot return to work either as a self-employed individual, or as an employee in the same sector for a minimum of 24 months. This is often referred to as ‘phoenixing’. Ignoring this rule could result in HMRC overturning any previous decision to grant entrepreneurs relief and may charge back taxes and penalties.
It can take up to 3 months to formally strike a Limited Company from the registrar of companies. In this time you may win another contract and have to incorporate another during this time.
In this case I would always suggest speaking to a specialist contractor accountant to properly advise you on how best to utilise your LTD company should you ever find yourself ‘on the bench’ out of contract.
The advice to add another shareholder is not good advice. Has the “accountant” forgotten the Section 660/ Arctic Systems fiasco? Whilst the Arctic case was found in the PSC’s favour, the issue here is the basis on which any additional shares are allotted. If not at market value then there is a Settlement which would mean that any dividends apportioned to the new shareholder would be deemed to have really been given to the settlor, i.e. original shareholders.
Could you clarify the advice above – I was informed the ‘phoenixing’ clause applied only to the ex-directors starting a new company or working in the same sector in a company owned by a family member, not for example winding up your company and working for PwC.
Thank you for your comment IRR.
To clarify, within two years after the company has been wound up the directors cannot incorporate another company that carries on in the same or similar trade or activity, including working for a spouse or family member.
HMRC must be satisfied that the winding up of a company is for genuine reasons and not for the sole purposes of “phoenixing” the company to gain clear tax advantages.
Thanks a lot for the comment Gordon.
In reference to Section 660 and the Artic Systems case, Limited Co. contractors looking into re-structure the share ownership within their Limited Co., can do so with certainty that they will be exempt from the settlements legislation on the basis the shares are gifted to either their spouse or civil partner.
The exemption only applies for spouses and civil partners, not all family members/friends. If shares are gifted to a spouse or civil partner, the transaction is exempt from the settlements legislation and there are no further capital gains or inheritance tax implications.
A Spouse or Civil partner may choose to buy the shares at market value, however this does not apply to Contractor Limited Companies as contractors do not tend to sell their companies, rather they are closed. Any valuation could be deemed inaccurate and could be challenged by HMRC.
If I am a contractor and decide to work full time in search of stability- even in that case I cannot close my company?
This seems quite stiff in that we would end up keeping the company open and working at full time at the same time?
Thank you for your comment Parry.
Should you be offered a PAYE position you can still close your Limited Company, as HMRC would be satisfied that you did not simply close the company to gain a clear tax advantage. This would only become an issue if you were an employee of your own Limited Company again within 24 months.
You could of course, slowly dribble a payroll below the tax threshold and only pay NI at the basic rate – no tax.