Do banks banning PSC workers warrant you closing your limited company?

It’s unknown exactly when it will be delivered. But a lot of contractors look like they’re waiting until after the next Budget, and the accompanying final IR35 legislation for 2020, before making a firm decision on what (if anything) to do with their limited company, despite the ban on ‘Ltd’ workers by several banks being in place right now, writes John Bell, founder and senior partner at licensed insolvency practitioners Clarke Bell.

But waiting to take a firm decision on the future of your Personal Service Company does not equate to doing absolutely nothing today.

Consider that a lot of industry experts believe that nothing is going to stop the IR35 rule changes coming into force in April 2020. Whatever is mentioned in the eventual Budget, a lot of banks are already saying that they will no longer be dealing with contractors because of the new off-payroll framework. Whatever your views on this ‘blanket approach’, any contractors who are currently working with a bank would be wise, in our view, to prepare for this eventuality.

Banks are bringing your limited company’s future into focus

The options available to such limited company contractors will be to work with the bank as an employee; or through an umbrella arrangement, or to work elsewhere for a bank (or other end-user), who will still work with contractors. If you choose the initial two options, then you’ll have a decision about what to with your limited company.

If you feel that you will definitely not return to PSC contracting due to IR35 reform, then you would be well-advised to close down the limited company.

However, if you’d rather see whether you like the employee role with your former client, then it would be advisable for you to keep your limited company until you are totally sure that this is the route you intend to follow.

Once you’ve decided to park or part ways with your PSC….

Having decided to close down the company, a contractor should speak to their accountant to work out their best option for the closure process – typically a Voluntary Strike Off or, if the value of the assets of the company are over £25,000, a Members’ Voluntary Liquidation (MVL).

Beyond that, it’s very much a case of ‘horses for courses.’ In other words, it’s going to be down to the judgement of each individual director as to whether the company becomes dormant or closes completely. You would not need to provide justification to HMRC either way.

But on the assumption that you are moving to a permanent role, and will be a higher rate taxpayer, if you do decide to close your company then;

• If your retained profits are less than £25k the company can carry out a capital distribution of these funds without a Members Voluntary Liquidation (MVL) via an insolvency practitioner.
• Where the retained profits are over £25k an MVL will be needed. Where you qualify for Entrepreneurs’ Relief this should enable you to greatly reduce your tax bill compared to taking the retained profits as dividends.

If you decide to make your limited company dormant, there will be the following implications/opportunities:

• You will still need to file accounts and Confirmation Statements. Accounting fees will reduce considerably for those years where you are fully dormant.
• VAT – it would be sensible to de-register to cut down on administration.
• You can continue to take dividends from the company to reduce the retained profits. Obviously seek advice each tax year to determine what a good tax efficient dividend level is.
• In the year that you become dormant, consider whether you wish to fund your pension. This is another way to reduce retained profits and should also reduce corporation tax or even achieve a rebate.

Final thought

Despite all the banks’ memos to PSCs pressurising contractors into making a decision, with your business, it is certainly a good idea to not rush into anything, even if one of your clients will stop engaging your limited company in the run-up to the April 2020 IR35 rules.

We say, 'see how the current market develops' – after all, you have three years after trading ceases before you would be ineligible for Entrepreneurs’ Relief. And last but not least, make sure you take advice at the time, as the tax position can change over time. Which brings us neatly back to the Budget. It really will be one to watch, whenever of course the UK government – of whatever hue -- finally gets around to delivering it.