The IR35 reforms that have come into effect in the private sector represent the most significant changes to employment tax for a long time.
The changes, that came into force on 6th April 2021, will transform the way that contractors and other off-payroll workers in the private sector will pay tax and operate.
What is IR35?
IR35 is a tax avoidance rule which combats ‘disguised employment’ where a contractor provides their personal services to a company through their own intermediary e.g. a Personal Services Company (PSC).
However, this tax loophole has now been closed, meaning that there are probably a lot of PSCs out there that are either still solvent but aren’t in use at all, or are now insolvent. Either way, it’s important that contractors deal with their PSCs in the most cost-effective and tax-efficient way.
The reason that reforms are being made regarding IR35 in the private sector is because HMRC has concerns about non-compliance with it. The reforms apply to all payments made to a contractor on or after 6th April 2021, unless the labour was done before that date.
Companies that have been using the services of contractors will be affected by these reforms too, not only contractors. This is because, previously, the responsibility for determining a contractor’s status was on the contractor themselves. But the reforms have flipped this around, so that the onus is now on the end-user engaging the contractor’s services to ensure that IR35 applies.
Furthermore, if they find that IR35 does apply, the reforms put the responsibility for operating PAYE and NICs on the company that has contracted the PSC.
These reforms will make some contractors’ current operating model unfeasible, and end-users are likely to be afraid of being held accountable for wrong IR35 decisions, making them less willing to engage with contractors.
Private Sector Contractors – COVID-19
Pretty much every sector has faced difficulties, as the coronavirus pandemic caused chaos amongst businesses and their operations.
For contractors, some have had no work coming in at all, whilst some have been lucky to even have a reduced amount of work. This is due to companies being hesitant to go ahead with projects while the economy is still in a bit of a limbo. Even the contractors that have managed to get some work during the pandemic are still facing issues, with late payments from some companies that are usually on-time with their payments. This, in turn, can negatively affect the cash flow of the PSC, putting them at risk of insolvency.
Creditors’ Voluntary Liquidation – Wosskow Brown
If it is clear that liquidating your PSC is the best option, there are a couple of methods of doing this. There’s a Members’ Voluntary Liquidation (MVL) or a Creditors’ Voluntary Liquidation (CVL).
If the PSC is still solvent, an MVL allows the company to be closed and extracts the profits in a tax-efficient manner. But if the company is insolvent and you don’t need your PSC anymore due to the IR35 reforms, you can enter a liquidation process using the route of CVL.
This process will bring an end to your company, using an insolvency practitioner who will take care of everything on your behalf. What about any debts? Well, part of the practitioner’s job is to liaise with outstanding creditors, and any debt that remains at the end of the liquidation process will be written off. However, if the debt was secured with a personal guarantee, you will still be required to pay it.
If you find yourself in an unstable position as a contractor and think that liquidation is the option, seek advice from us at Wosskow Brown. We can point you in the direction of help as we work closely with a number of trusted insolvency practitioners and can operate under a single fee for a smooth transaction.