IR35 is why contractors won't want Entrepreneurs' Relief removed

It’ s not just serial entrepreneurs who’ll be relieved that Entrepreneurs’ Relief was only “tinkered at the edges” in Budget 2015 so an avoidance measure can go ahead; it’s contractors caught by IR35 too, writes Steve Parker, a partner at Opus Restructuring.

That’s because where a contractor company is caught by the taxman’s IR35 legislation, there is no ability to draw dividends from the company. In fact, funds may only be extracted as a salary.

This is problematic to the typical personal service company with one person at its helm who (like this one) is deemed to be inside IR35 by HM Revenue & Customs. Specifically, in such a company, it is common for cash reserves to be built up from a long period of trading, but getting your hands on that cash, where IR35 applies, appears to be very inefficient from a tax standpoint if you’re the owner, because salary is the only extraction form.

It is under these circumstances that the 10% tax rate available under Entrepreneurs’ Relief can make a Members’ Voluntary Liquidation (MVL) a viable, if not attractive, way to windfall that cash.  

As has been explained on ContractorUK previously, a MVL is the procedure taken to wind-up a solvent company, on the basis that the company can pay all its liabilities in full, as well as the cost of winding up, within 12 months of declaring insolvency.

So while it’s a quite a serious and definitive end to your contractor ‘Ltd’ company, if you’re being pushed to that end by HMRC and its unpopular IR35 legislation, provided your company has been in business for at least 12 months, then the advantage of the MVL process is that Entrepreneurs’ Relief may be claimed on all proceeds paid to the shareholders from the MVL. It’s undoubtedly not what the Labour party, the architects of IR35, had in mind when they recently praised ER for rewarding the efforts of those who go into business, but for IR35-caught contractors it’s a reason to be relieved that the relief is staying put -- at least for now.