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.