What is IR35 legislation?
IR35 describes two sets of tax legislation designed to combat tax avoidance by freelancers who work through a limited company, rather than being a direct employee of a company. HMRC regards people who work in this manner as being ‘deemed employees’. If caught by IR35 legislation, they have to pay income tax and national insurance contributions as if they were employed. As a freelancer, you may be familiar with how this affects your earning potential, with some individuals reporting a 25% loss of earnings.
What if IR35 legislation deems me to be an employee?
If the rules deem you to be an employee rather than a freelance contractor, taking steps to remain within the law is key. What’s more, you’ll need to ensure you take the route most beneficial for you. This is important as the path you take can have other implications. For example, if you simply wind up your company, you will pay tax on any residual assets at 40%, but if you apply for entrepreneurs’ relief, you will only pay 10%. When you’re closing down your freelance company, it’s easier to navigate IR35 legislation with the expert guidance of insolvency practitioners.
What options are available for your freelance company?
Many companies apply to Companies House for a voluntary company strike off, but if you have creditor agreements in place or have recently traded, it may not be granted. That’s why working with insolvency practitioners towards a Members’ Voluntary Liquidation (MVL) may be a more appropriate course of action.
What is a Members’ Voluntary Liquidation (MVL)?
MVL may be utilised to close a solvent company, which has simply come to the end of its natural life. The reasons for this could be IR35, but could also include the fact that you are retiring or re-entering employment.
MVL allows shareholders to be granted their investment in an advantageous manner. However, Capital Gains Tax must be paid on the money made on the original investment. And if the company’s assets are greater than £25,000, the distribution of capital can only be undertaken by the liquidator. Overall, MVL is the most tax efficient route, especially when entrepreneur’s relief is factored in.
Insolvency practitioners can help guide you through company closure and IR35 legislation
Closing a company is an intricate matter that holds many different potential paths. The wisest thing to do is to seek professional guidance from experienced insolvency practitioners who can ensure you choose the right options for you.
BEACON Licensed Insolvency Practitioners – here when you need us
At BEACON Licensed Insolvency Practitioners we are fully licensed and qualified to help with the winding up of your freelance company and an initial meeting is completely free. To book yours, please call us on 02380 651441.