Are you a contractor with a Personal Service Company (PSC)?
With IR35 reform looming, did you know you can change your employment status and liquidate your company using an MVL?
The government’s reform of IR35 rules is forcing many contractors operating Personal Service Companies to review their options.
You choices are:
- Go permanent – PAYE
- Use an umbrella company
- Show that you are ‘self-employed’
Closing down your PSC
If you are left with a PSC that has no useful purpose, you will need to consider how to close down your company and extract your cash in a tax-efficient manner. This is where a Members Voluntary Liquidation (MVL) may be helpful.
An MVL is a formal process for closing down a solvent company in a cost-effective way, where a company with net assets over £25,000 is put into liquidation.
There are often substantial tax advantages in conducting an MVL as the monies that will be distributed to shareholders represent a return of capital, on which capital gains tax is payable by the shareholder.
Tax advantages of an MVL
Distributions declared by a liquidator are taxed as a capital distribution, which is tax on the capital gain, (this is the gain in the value of the shares compared with the amount which the shareholder initially paid for them). For example, if a shareholder were to receive a distribution of £1,000 on a share which they purchased for £1, that would represent a notional capital gain of £999.
The primary advantage for contractors is that, if the circumstances are correct, monies received as a capital distribution may qualify for Entrepreneurs’ Relief (at a rate of 10% on qualifying disposals).
It is claimed as part of a personal tax submission for the period in which a capital distribution is received, and the following criteria must apply:
- The shareholder must own at least 5% of the shares;
- They must have been owned for at least one year prior to disposal (in this case liquidation);
- The assets must be distributed within three years of cessation.
Where Entrepreneurs’ Relief is not available, a UK individual will typically pay a rate of 20% on capital gains, so an MVL may still offer a substantial tax saving over taking dividend income.
An insolvency practitioner can assist with the liquidation of your company. However, we can’t provide advice on your personal tax position. Any specific queries regarding a director/shareholder’s personal tax position should be dealt with by a personal accountant or tax adviser.
If you’re thinking of closing down your PSC in favour of a different employment status, please contact us – we offer free consultations. Call us free on 0808 168 7540.
If you’re thinking of closing down your personal service company and want to know more about Members Voluntary Liquidations, please contact us on Call Freephone: 0808 168 7540.
To arrange a call back, please provide a telephone number and company details in the contact form below, with a convenient time for us to contact you.