Outsourced contractor or consultant? Your situation may be able to change, and you should act quickly!

French Duncan | 02 March 2020

Many outsourced contractors, consultants and freelance workers are about to have a change of employment brought upon them, and they will need expert advice to ensure they navigate these waters as efficiently as possible.

In April 2020, the responsibility for compliance with IR35 is shifting from off-payroll contractors to end-users (i.e. large companies), therefore the responsibility for PAYE in a normal 3 entity contract chain will lie with the company engaging the services of the contractor and not with the personal service company or intermediary. The government has stated that the new IR35 rules will impact 170,000 consultants, 60,000 end-users and generate additional tax revenue of £3.1billion between 2020 and 2024.

The majority of end user companies who utilise contractors will therefore have to examine the relationship and determine whether the contractors require to become employees of the end user company. Rather than getting it wrong and being fined, a number of companies have a policy of not using Personal Service Companies (PSC) in order that they don’t fall foul of the changes. HSBC, Morgan Stanley, M & G Investments, Barclays and Lloyds have all said that they would ‘cease and desist’ all Personal Service Company (PSC) engagements. There are also reports that HMRC’s online testing tool CEST, which checks employments status, has been proven to be unreliable.
This will lead to live Personal Service Companies which are no longer required and some will be holding considerable assets in terms of cash at bank. A voluntary strike off may be used to strike off the company if there are restricted funds in the bank – less than £25k. The most cost effective and tax efficient way to deal with the Personal Service Companies who have larger reserves is likely to be through the MVL procedure.

Utilising MVL to close the Personal Service Company
Closing your company using a Members Voluntary Liquidation (MVL) could be the most efficient option for you. The use of an MVL would mean that you:

  • Extract the reserved funds of the business in cash.
  • Pay only 10% tax and also use applicable CGT allowances.

In order to use the MVL Process the Personal Service Company would require to meet the following criteria:

  • Reserves of over £35,000 - after paying all final liabilities. This ensures that it is tax efficient when taking into account the costs associated with the MVL procedure.
  • The company has traded over 12 months
  • The shareholders are directors or employees
  • You will not trade again via a company doing the same type of work within 2 years.

If you would like any advice on IR35 roll out or on the MVL process and how to liquidate your solvent limited company ahead of the IR35 private sector reform, please contact our team on 01389 765 238.

As a firm, we are also advising many end user companies about this change to legislation.  To find out more from the employer's perspective, visit this webpage to download our FREE GUIDE.

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