I’ve been offered a permanent staff position so I don’t need my company anymore. I have a fair chunk of cash sitting in it. What are my options?
It’s a sad fact that in today’s legislative climate, more and more seasoned contractors are being forced, or are choosing to move back into staff roles. This is an inevitable consequence of the recent legislation changes – if you’re a contractor in the public sector, the chances are you have no option, and if you’re in the private sector, you may be looking at the diminishing reward for being a contractor and deciding that it’s not worth it.
Regardless of the reason, moving out of contracting could leave you with a problem: what to do with the reserves in the company bank account. As regular readers of CQOTW will probably have guessed, the answer is “It depends”. It depends on how much you have in reserves, whether you need access to these funds straight away, and how much income you’ll have in the next couple of years.
In most circumstances, the least tax efficient thing to do is to declare a massive dividend and close down the company, as there is a potential 37.1% tax liability on this dividend. Assuming the company is to be closed then, this leaves two main options: close company and declare a capital distribution; or pay the reserves into a pension scheme. In reality the solution is normally a blend of the two, with a little bit of dividend thrown in. Here are the steps that you should take:
Step 1: Ensure that all shareholder have received dividends at the most tax efficient rate. Generally, this will mean ensure that no less than £43,000 has been from the company by way of salary and dividend. If need be, declare a further dividend.
Step 2: Ask yourself whether you think you’ll need free and easy access to these funds between now and your retirement age. If the answer is No, consider paying some or all of the reserves into a personal pension. This is very tax efficient but does tie up the funds until you retire. In reality, we have found that most contractors will pay a portion, but seldom all, of the reserves into a pension.
Step 3: Decide whether a Members Voluntary Liquidation is required or if a simple winding up can be arranged. Once you’ve paid all the dividends, if the reserves exceed £25,000 and you want a capital distribution, you need to appoint a liquidator who will then take charge of the company’s assets. You can expect to pay around £2,500 for the liquidator.
If the reserves are less than £25,000 then you do not need to appoint a liquidator, rather you can simply declare a capital distribution and issue the reserves in accordance with the shareholding.
In both scenarios, assuming you qualify for Entrepreneur’s Relief, you each shareholder will receive the first £11,300 tax free, with the balance payable at just 10%. When you consider that currently dividends can be taxed up to 37.1%, the savings an be enormous.
Once these steps are taken, the company can then go through whichever process is appropriate. The Simple Winding Up process (for those companies below £25,000) is straightforward and you can access the funds immediately. The MVL process can take a while, but if the balance sheet is structured properly when you enter the process, you should not need to wait at all for the funds either. As you would expect the MVL process is a bit more drawn out and can take months to finalise, but the tax savings would normally make this worthwhile.
Remember that even although the legal ceiling for a simple winding up is £25,000, it doesn’t necessarily apply that this is the best option. Because of the fees payable to the liquidator, for reserves up to £35,000 it can often make more sense to declare a dividend to bring the value down to £25,000, and pay the extra tax rather than pay a liquidator and go through the hassle of an MVL.
The capital distribution must be declared on your self assessment return on the Capital Gains Tax pages, and you should ensure that you claim Entrepreneur’s Relief on the return to ensure you only pay 10%. You’ll need to satisfy yourself that you qualify for ER before claiming however. Your accountant should be able to guide you on this.
In conclusion, taking the right steps when closing down a company is complicated and fraught with potential for expensive mistakes. While you could do this yourself, we strongly recommend seeking professional advice.