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:
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.
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.