Close down your company and avoid IR35 Investigations?
I have often been asked if a contractor closes down their company can they avoid IR35 investigations? Ie if the company no longer exists, it and the owner/director can’t be investigated.
It should be born in mind that HMRC have the right to restore a closed (or dormant) company if they have reason to believe that the amount of tax owed makes it worthwhile doing so. Closing a company requires that the contractor submits a final return to HMRC and that can be investigated for PAYE compliance – which can develop into an IR35 case – up to 12 months after the actual closure date.
Also should HMRC suspect incorrect information has been provided they have up to six years to investigate a company’s records – and if they suspect fraud or negligence, this extends to 20 years. So simply closing the company does not mean you won’t be investigated.
Although HMRC have a fairly modest record of winning IR35 cases, should they succeed then a significant amount of money may need to be repaid. This will certainly be the unpaid PAYE/NI taxes plus interest from the start of the investigated period. Under the provisions of Regulation 72, if HMRC conclude that you had deliberately misstated your PAYE/NI position, as opposed to simply making a mistake over it, they can also impose penalties of up to 100% of the unpaid tax.
More importantly, Regulation 72 allows HMRC to pursue the director of the company personally for any outstanding debts provided they have firm evidence that said director was in a position to exercise some control over the affairs of the company. In other words, the owner/director/worker of “one person ltd companies” are not protected from personally from having to pay the total debt.
The chances of a closed company being investigated may be small, but they are real. Closing the company does not offer any protection from IR35 and my advice is not to close down your company and start off a new one to try and avoid IR35 investigations.
Graeme Bennett ACMA MBA