Will the new IR35 rules from 6th April 2024 make a difference?
IR35, also known as the Intermediaries Legislation, is a complex set of HMRC rules that are used to determine whether a contractor should be treated as an employee or self-employed for tax purposes. IR35 came into force in April 2000, and has had a number of changes since, with the most recent significant reform coming in April 2021.
This reform has had an adverse impact on many contractor companies, with some directors looking to find the most efficient way to close their companies down – which is where Insolvency Practitioners come in. The latest IR35 rule changes, introduced on 6th April 2024, aim to reduce this impact.
Our Insolvency Practitioners have had many enquiries from directors of contractor companies who have been considering closing their companies since the April 2021 reforms (which made engaging contractors much harder for businesses) – about their best course of action. In this article, we briefly look at what the April 2021 reforms were and why they had such an adverse effect on some contractor companies, before looking at whether the 6th April 2024 reforms will make a difference. Finally, we look at the most efficient ways to close down a contractor company – either solvent or insolvent.
The April 2021 IR35 Reforms and why they are important
Prior to April 2021, contractors were typically responsible for determining their own employment status. Under the new rules, this responsibility passed to the end-client. Public sector end-clients had been required to do this since 2017, and the 2021 reforms meant that medium and large sized private sector end-clients now had to do the same.
On the face of it, this might not seem a big change. However, quite apart from it being a complex and time-consuming process to determine whether a contractor falls inside or outside IR35 (for which directors should seek advice from a tax specialist), the implications for contractor companies and the end-clients are significant, for two main reasons:
- Is the contractor considered to be inside IR35? If yes, then it is likely that the contractor’s income will be significantly reduced as they will become liable for income tax and National Insurance on their remuneration from their end-client as if they were employees.
- What about end-clients? For end-clients, which might be the hiring client or a recruitment agency, they become liable to pay the contractor’s employment taxes, which could have a material financial impact, as well as leading to fewer arrangements with contractors.
The potential outcome for contractor businesses is that the changes mean it is no longer viable for directors to operate their businesses in the long-term and that closing down the business becomes an option that needs to be considered. That is when directors should talk to an Insolvency Practitioner.
If the business is solvent, there are two options for closing it down, with the choice depending on the level of retained profits.
Closing a solvent IR35 limited company – Company Dissolution or Members Voluntary Liquidation.
- Voluntary Company Dissolution. Sometimes known as striking off, this option is an informal way of closing down a company that is no longer required when retained profits are less than £25,000. It can be a quick and simple process, but directors need to: inform HMRC of their intention to close; file their company accounts; close the business’s bank account; transfer any assets out of the business’s ownership and inform all the business’s creditors.
If using this method, the business must be solvent and able to pay all its creditors. If not, an Insolvency Service investigation might take place, with possible outcomes being insolvency claims against the directors personally and/or director disqualification. For this reason, it is sensible to consider taking advice from an Insolvency Practitioner before dissolving a company.
- Members’ Voluntary Liquidation (MVL). This option is for when retained profits are greater than £25,000 and requires the appointment of a Licensed Insolvency Practitioner. As with company dissolution, this option is only available for solvent companies that are able to pay all their creditors in full (plus any interest) within a period not exceeding 12 months.
With MVLs, there is also the possibility that, under current legislation, the tax liability might be reduced to 10% with eligibility for Business Asset Disposal Relief (BADR – formerly known as Entrepreneurs’ Relief). Currently BADR has a lifetime limit of £1m per person and is available to those disposing of the shares of a trading or holding company or group in which they have held at least 5% of the voting rights for at least two years. Eligibility for BADR makes an MVL a particularly tax efficient process, and directors should seek advice from their tax advisers to determine if they qualify for BADR
Closing down an insolvent IR35 limited company
If, however, the company is insolvent, a Director should consider using a Creditors’ Voluntary Liquidation (CVL). As with an MVL, a Licensed Insolvency Practitioner must be appointed in order to realise the business’s assets and distribute the remaining funds to creditors.
It is also worth knowing that company directors might be able to claim redundancy pay if the company enters a Creditors’ Voluntary Liquidation.
What are the April 2024 changes? Will they make a difference*?
Under the latest changes, which came into force on April 6th, 2024, HMRC will use “assumption and best judgment” to reach an estimated value of taxes already paid by the contractor when dealing with roles outside of IR35. This means that instead of the full amount of tax being taken by HMRC twice, some deductions can be made when a role moves from outside to inside IR35 instead.
HMRC will take the following into consideration when making those deductions:
- Corporation Tax – via the client or recruiter
- Income Tax and Employer NICs are paid to the contractor – via the client or recruiter
- Tax on dividend payments
- Class 2 and 4 NICs
Employer NICs and the Apprenticeship Levy do not appear on that list, so the caveat is that there is still a chance of doubling up on those payments.
These changes will apply retrospectively for arrears dating back to April 2017 for public sector businesses and April 2021 for those in the private sector. However, for liabilities that have been settled, these rules will not apply, meaning you are unable to claim back any “double taxation” payments.
These changes are considered to be relatively minor, but they could have an impact on the number of contractor roles that appear outside IR35, which would be of benefit to both end client businesses and contractors.
How this plays out only time will tell, but the consensus currently is that it will lead to more roles sitting outside IR35, and thus avoiding the double taxation scenario.
(*As always, businesses should seek advice from a tax expert regarding IR35 and the implications of the April 2024 changes.)
Talk to us about closing down your IR35 contractor company
IR35 rules that affect contractor companies, particularly post the April 2021 reforms, are complex and have already meant closure for many companies. Our experiences show that we know that many more are considering closing as a result, notwithstanding the April 2024 reforms.
Our Licensed Insolvency Practitioners are highly experienced in providing the specialist advice needed to select the most appropriate and efficient closure procedure for any IR35 Company.
If you are considering closing your contractor limited company as a result of issues caused by IR35, the sooner we talk – either direct or referred from your accountant/tax adviser – the better. We will talk you through all the options available, so that you know exactly where you are, helping you to make the best possible decisions. The first discussion is free.
In the meantime, if you need our help and advice in any of our specialist insolvency areas, please contact us or call the Insolvency Practitioners at any of our offices, below, for a FREE initial discussion on the phone, on line or over a coffee.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
