Written by FCSA Business Partner, Clarke Bell Limited
With recent changes to IR35 coming into effect and the fallout from the collapse of Carillion, the current economic climate is especially tough for contractors.
According to Deloitte, the average contractor’s take-home pay was predicted to see a reduction of 13% when IR35 changes were implemented. However, for some, the consequences have been much more severe, with many contractors seeking to close down their limited companies.
Similarly, a large number of contractors and subcontractors have been forced to close their companies as a result of a knock-on effect of construction giant Carillion collapsing.
If any of your clients are looking to close their limited companies, here are a few options to consider depending on their specific circumstances.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation (CVL) is the best option for contractors who are insolvent and cannot repay their debts. Entering into a CVL means the limited company will stop trading and be liquidated. Crucially, it is very different from a Compulsory Liquidation in which case the consequences are much more severe and long-term.
The benefit of a Creditors’ Voluntary Liquidation (CVL) is that it acknowledges their duties as a director to their creditors and allows contractors to close their companies on their own terms rather than it being a forced decision by the Court.
Throughout a Creditors’ Voluntary Liquidation (CVL), it is vital to balance the needs of the contractor with the duties owed to all the stakeholders who are involved with the company, including employees and creditors. To ensure this balance is achieved, both correctly and legally, the help of a licensed insolvency practitioner is always advised.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation (MVL), also known as a solvent liquidation, is for companies that are not in any debt. There are various reasons why a contractor may want to close their solvent company:
- they’ve just completed a contract
- they’ve decided to work in a company as a full-time employee
- they’re approaching retirement
- they’ve been negatively affected by IR35 changes
- they wish to cease contracting and unlock the cash from their limited company
No matter the reason, using a Members’ Voluntary Liquidation (MVL) to close their contractor company could be the most tax-efficient method. And it could save them thousands of pounds.
This is because funds distributed are subject to Capital Gains Tax (CGT), rather than Income Tax. Additionally, if contractors qualify for Entrepreneurs’ Relief (ER), they will benefit from a 10% CGT rate on distributions.