From April 2021, IR35 – otherwise known as off-payroll working – also apply to the private sector. It is a move that could make claiming Entrepreneurs’ Relief the next step for many businesses.

Medium and large-sized private sector businesses are now responsible for determining the IR35 status of their contractors. Workers who fall inside IR35 must have Income Tax and National Insurance Contributions (NICs) deducted at the source. 

With this reform now affecting the private sector, many contractors are considering the possibility of liquidating or selling their companies. The new legislative burden makes it expensive and complex to hire contractors, reducing the profitability of these businesses. 

If IR35 reform has impacted the viability of your business to this extent, one option you can consider is claiming Business Asset Disposal Relief – previously known as Entrepreneurs’ Relief.

What is Entrepreneurs’ Relief?

Entrepreneurs’ Relief (Business Asset Disposal Relief since the 6th of April 2020) is a reduction on Capital Gains Tax for the disposal of qualifying business assets, applied when selling or liquidating all or part of a company.

Entrepreneurs’ Relief is a tax break which means you pay a lower rate of Capital Gains Tax when selling shares in your business or disposing of it. In the case of many contractors, it’s a vital tax break when you stop trading and close down your service company. Assuming you meet the qualifying criteria, you will pay Entrepreneurs’ Relief on any capital gain you receive when dissolving your business. You can claim this tax relief as many times as you like in your life up to the allowance which has just been reduced to £1m.

If you qualify for Entrepreneurs’ Relief, you will pay a flat rate of 10%, whereas Capital Gains Tax – a tax on profit made on the disposal of an asset – can reach 28% for higher rate taxpayers. This contributes to significant tax savings for freelancers and contractors who are shutting up their companies.

Starting from the 11th of March 2020, there is a £1 million lifetime limit on the amount of Relief you can claim. Within this limit, however, you can claim as many times as you would like.

In essence, it allows you to apply a reduced rate of 10% capital gains tax (instead of the usual 20% for higher rate taxpayers) on the profits you make when you sell qualifying assets. It makes it one of the most attractive tax benefits available.

To qualify for Entrepreneurs’ Relief, you must have owned at least 5% of your business for two years or more – this is to prevent people from forming companies only to close them soon after and pay less tax. If you are dissolving your business, you need to make sure you dispose of its assets within three years to be eligible.

While not directly linked to the IR35 rules, Entrepreneurs’ Relief may soon become even more critical for contractors from the 6th of April 2021 onwards. When IR35 reform is rolled out, it is predicted that some contractors could retire early or stop working through their limited company. If this happens, it is crucial that contractors who cease trading can still make the most of this tax break. 

Can you claim Entrepreneurs’ Relief? 

You may claim Entrepreneurs’ Relief on material disposal of business assets which consist of: 

• All or part of an unincorporated business: if both of the following apply for a minimum of 2 years up to the date you sell your business:

• you      are a sole trader or a business partner
• you      have owned the business for at least two years 

• shares or securities in the shareholder’s company: if both of the following apply for a minimum of 2 years up to the date you sell your shares:

• You      are an employee or officeholder in the company 
• You      are holding the above share capital for the whole of the qualifying period 
• The      company’s main activities are in trading, or it is the holding company of a trading group

Other disposals may qualify for Entrepreneurs’ Relief. These include disposals of assets owned by the individual but used in their company or a partnership of which they were a member (e.g. a warehouse). There are also different rules for shares which are from an Enterprise Management Incentive (EMI).

You can find more information on the Entrepreneurs’ Relief eligibility criteria on the government website for Business Asset Disposal Relief.

What is IR35? Does it apply to your contract?

IR35 is a word used to describe two sets of tax legislation designed to combat tax avoidance by workers and the firms hiring them. Those who supply services to clients via an intermediary, such as a limited company, would be an employee if the business did not use the intermediary.

Such workers are called ‘deemed employees’ by Her Majesty’s Revenue and Customs (HMRC). If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the limited company contractor thousands of pounds in additional income tax and NICs.

Despite having been in force since April 2000, IR35 is heavily criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuinely small businesses. The Government is replacing the original IR35 legislation with the new Off-Payroll tax, which The Government initially introduced into the public sector in April 2017 and will be extended to the private sector from April 2021.

If you are a genuine contractor, freelancer, interim or consultant in business on your account, you should have nothing to fear from IR35. It is so long as you take the time to understand how the legislation works and apply best practices to ensure it does not apply to you and have a defence prepared if investigated by HMRC.

For firms that hire contractors, where the new Off-Payroll tax needs to be considered, they should also not fear the new legislation, provided they take the correct steps when hiring and engaging their contractors.

Other insolvency solutions post-IR35 reform.

If you are considering liquidation of your company as a method of complying with the new IR35, you may also want to consider the MVL (Member’s Voluntary Liquidation). 

It is a formal process for closing down a solvent company in a cost-effective way. To be solvent, the business must be able to settle its liabilities in full within 12 months. It is used to benefit from much lower tax rates on the capital you extract from your company. 

According to HMRC, there are five steps necessary to obtain an MVL: 

1. Create and sign the Declaration of Solvency (a statement saying that the directors have assessed the company and believe it can pay its debts, with interest at the official rate) 

2. Call a general meeting with shareholders no more than five weeks later, and pass a resolution for voluntary winding up

3. Appoint an authorised insolvency practitioner as a liquidator, who will take charge of winding up the company

4. Advertise the resolution in The Gazette (The Gazette publishes online profiles of every UK business registered with Companies House) within 14 days 

5. Send your signed declaration to Companies House within 15 days of passing the resolution

This may sound like a complex process. However, the tax benefits of an MVL – or obtaining Entrepreneurs’ Relief – are well worth this hassle. This is especially true in the face of new IR35 changes. Do not hesitate to contact us to book a consultation.