Close Your Company, Avoid IR35?

A question that some contractors often pose is whether they should close down their companies and start up a new one so as to avoid an IR35 enquiry. The logic being that once the company has vanished then HMRC have nothing to investigate and even if they did they would have to whistle for their money as all assets would have disappeared along with the company.

Whilst there is some credence to this argument the truth is contrary to what is played out in reality, although rarely seen in the writer’s experience.

Voluntary closing down of a company involves an application to Companies House for striking off. The Registrar then publishes the notice of proposed striking off in the Gazette to allow interested parties the opportunity to object.

The Gazette is the official weekly newspaper record in the UK. For companies incorporated in England and Wales the notice is published in the London Gazette, for companies incorporated in Scotland – the Edinburgh Gazette and for companies incorporated in Northern Ireland – the Belfast Gazette. If there is no reason to delay the Registrar will strike the company off the register not less than three months after the date of the notice.

It is during this three month window that HMRC ordinarily have their chance to keep the company alive and will do so if there is an IR35 enquiry in progress or they have suspicions that they wish to explore further.

Although historical experience shows that where the Revenue fail to lodge any objection to a company's striking off then they have missed the boat, HMRC does have the power to restore a closed company and pursue the directors for PAYE arrears. The writer stresses however that in all his years’ experience of IR35 and having defended between 350 – 400 contractors in IR35 enquiries, he has never seen HMRC take this route.

Nevertheless it does pose a real threat and must be taken into consideration when contemplating striking off a company.

Regulation 72 Income Tax (PAYE) Regulations 2003

HMRC can recover the PAYE debt from an employee if one of two conditions are satisfied:

Condition A
That the employer took reasonable care to comply with the PAYE regulations and that the failure to deduct PAYE was due to an error made in good faith.

Condition B
HMRC are of the opinion that the employee has received relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments.

Unless the director of a personal service company has acted dishonestly it would be difficult for HMRC to use Regulation 72 as IR35 is not black and white. If HMRC are of the opinion that IR35 applies to a contract(s) but the contractor is of a different opinion and has taken steps to support that opinion has their company made an error? I would say 'no'.

So if Regulation 72 is rarely invoked and only used in the most extreme cases then regular closure of a company and setting up a new one would appear to be a useful way of ensuring that an IR35 enquiry will never ensue. Such behaviour is likely to guarantee to arouse HMRC's suspicions and invite an enquiry. Furthermore, there are the practical considerations to take into account such as the preservation of Entrepreneurs Relief and extraction of final profits upon dissolution may be more costly with the limitation of ESC C16.

Article written by Contractor Weekly with Graeme Bennett from Forbes Young.

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#13 Chris W 2016-07-26 22:15
Quoting Nigel s:
Would it not be less provocative to keep the company alive but ensure very low reserves so that if HMRC won ..........blah blah blah avoid the tax. ...... believe that IR35 doesn't apply as they're not taking any deliberately evasive action

All of the several similar themed threads are missing the point. IR35 says that the "ltd company is a vehicle of convenience" and doesn't exist for the purposes of that contract. Therefore a personal liability / relationship is created between your "client" - now deemed to be your employer who should have been operating PAYE and your good self.

The only difference is that HMRC doesn't put a burden on the employer viz NI contributions, which can happen if your working as "self-employed" without a Ltd company.

It will be you in the dock, in your personal capacity as Fred Blogs esquire that they are chasing.

it won't be you in your capacity as the director of a defunct company.
#12 Scott 2016-02-03 10:03
This article is dated 2012. Is the advice still valid?
#11 Iona 2014-04-15 08:16
We have an offer of a 3 year permanent contract with NHS ! Switching from Ltd to permanent it's not really economical ! Can we open a new Ltd every year and dissolve it in order to maintain our IR35 status ?
#10 Paul 2013-08-08 16:36
Dave, it is also tricky to justify a position being made redundant if you are the sole director of the company on the basis that a company has to have a director.
#9 Andy Vessey 2013-05-13 07:45
Technically this may be possible although this is likely to be non-statutory redundancy pay? This being the case HMRC would be likely to challenge you over the composition of the termination payment which may prove difficult to justify with there being no contract of employment.
#8 DaveT 2013-05-09 14:30
Suppose another company I own has taken all the business? Am I allowed to pay myself £30k redundancy, tax free if I close up? Can I do it again in 2 or 3 years?
#7 Seb Maley 2013-02-22 09:01
Quoting W.Reid:
I have UK Ltd company work in France and invoice in Euro and paid in Euro into UK company bank account. Can you advise the situation regarding VAT am i lible to charge UK VAT to my clients on the Euro invoices

If you are supplying IT services to a business customer in France then the supply will be treated as a B2B supply and outside the scope of UK VAT (in other words no VAT is chargeable).

Your invoice to the French customer should be denoted with the words “Subject to the Reverse Charge Procedure”.

You will also be required to complete and submit to HMRC what is known as an EC Sales List.
#6 W.Reid 2013-02-20 09:21
I have UK Ltd company work in France and invoice in Euro and paid in Euro into UK company bank account. Can you advise the situation regarding VAT am i lible to charge UK VAT to my clients on the Euro invoices
#5 Mark Pipe 2012-08-08 11:48
Why restrict yourself to a voluntary closure? You can get some very good tax breaks by liquidating and draw a line under the company at the same time. You would then argue the commercial reasons for closure and highlight that IR35 was never considered to be an issue.
#4 Chubby M 2012-03-13 13:56
I like Nigel S's logic, Hector forcing a low reserved company to liquidate, thus only taking partial funds... Any legal types who could shed some light on this approach please?
#3 Law student 2012-03-07 11:15
Although a company is a separate legal entity from its directors and employees, there are pathways for HMRC to pursue monies owed by a company. A court could see fit to impose a constructive trust on a director or employee who might be seen to be holding company funds. This would mean the funds would be retrieved from this entity on behalf of the company.
A director has a fiduciary duty to act in the best interests of their company, so the best advice is to close your company if you are no longer working through it. Otherwise time and effort is best spent on building a skill set that allows you to write the terms and conditions of your company contracts which should allow you to escape IR35.
#2 Hit me one more time 2012-03-07 10:16
#1 Nigel s 2012-03-07 10:13
Would it not be less provacative to keep the company alive but ensure very low reserves so that if HMRC won a sucessful IR35 claim they would only get the avaiable reserves and they would take the company down rather than the owner taking it down to avoid the tax. With this pproach it appears to me that the director (s) are more genuinely appearing to believe that IR35 doesn't apply as they're not taking any deliberately evasive action

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