How Does HMRC’s Three-Year Winding-Up Window Affect Contractors’ Tax Savings?

June 20, 2023 / Business Tips

Contractors commonly wind up their companies at one stage or another, for a wide variety of reasons. A contractor might close their company to pursue another venture in a different industry, take on a salaried position, or retire. In any case, this decision to close makes for a lot of work, especially if tax savings are high on the contractor’s priority list. For this reason, it is often tempting to leave the company in limbo, while the contractor moves on to their new goals. This staves off the often large tax burden that comes with closing a company, while leaving the contractor free to pursue more important things.

However, once contractors give into this temptation, it can be difficult to drum up the determination to return to the task of properly winding up a company. Life moves on, and the stagnant company sinks ever lower on a contractor’s list of priorities. In no time at all, three years pass, and the three-year winding-up window is firmly closed.

HMRC’s three-year winding-up window

The three-year window is the utmost reason to resist the temptation of letting your company languish. Acting within this window will allow you to apply for Business Asset Disposal Relief (BADR), which was known as Entrepreneurs’ Relief, before April 2020. This relief can greatly reduce the tax burden of closing your company, provided you act within this three-year window. This makes prompt action paramount, as the timer for this window begins the moment your company stops actively trading.

If your company is solvent and you take action within the three-year window, you may be able to obtain BADR. This is especially useful in light of the recent cut to Capital Gains Tax allowances, which have been near halved from £12,300 to £6,000. Anything in excess of this new figure will be subject to a 20% tax rate. With BADR, you can reduce your tax rate considerably, bringing the overall rate down to 10%. However, BADR has a lifetime limit of £1 million, and any earnings in excess of this will not benefit from the tax savings.

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Closing your solvent company

If you are looking to close your solvent company, and you are well within the three-year window, closing using a Members’ Voluntary Liquidation (MVL) might be the best option for you. This liquidation procedure is one of the most tax-efficient options, while also being a fairly straightforward procedure to enact. Directors can appoint an insolvency practitioner of their choosing to the role of liquidator. While in this role, the liquidator will identify the company’s assets, dispose of them, and make the necessary distributions. Liabilities will be paid, shareholders will receive their payments, and directors can enjoy the benefits of liquidation without the stress of handling the procedure alone.

Tax efficient MVL

As we mentioned, the MVL process is incredibly tax-efficient. It accomplishes this primarily in two ways. First, any distributions made under the MVL procedure will be taxed under Capital Gains Tax rates. CGT is considerably cheaper when compared to Income Tax rates, which will apply when using other forms of closing a company, such as company dissolution. Secondly, the MVL procedure allows eligible directors to apply for BADR, which we have covered in some detail previously. These two benefits combined make for a considerably lesser tax burden when compared to other methods of closing a company, and often means the MVL procedure is best for companies with retained profits.

While an MVL can be a good option for solvent companies, it is off the table for insolvent companies. If your company does not have enough assets to repay its liabilities, then it will fall into this category. Attempting to close an insolvent company through means such as an MVL will not be successful. In fact, it is likely to cause serious issues for you and your company. Directors that attempt to sneak their insolvent company into a procedure meant for solvent companies are often perceived as trying to flee from debt, which commonly results in legal consequences. Fines, personal liability for company debt, and a disqualification from acting as a director for up to 15 years are all typical punishments for this action.

The difficulty in gaining HMRC clearance

Although the MVL procedure and BADR can decrease your tax burden, tax clearance must be obtained from HMRC for it to take effect. This poses a bit of a problem; while you may close your company within the three-year window, if you do not obtain tax clearance, you may end up missing out on the savings offered by BADR.

This is increasingly an issue for directors looking to close their solvent companies, as HMRC is finding it more and more of a challenge to respond to clearance requests in a reasonable amount of time. There are several reasons for this, ranging from an increase in workload to a decrease in staff. Regardless of HMRC’s issues, it can have a negative effect on you.

Thankfully, the solution to this particular problem is quite simple. If you act quickly at the start of this window, HMRC will have around three years to process your case and grant tax clearance, granting you the benefits of BADR. Obtaining professional help can assist you in acting promptly, and the aid of an insolvency practitioner can make sure the ball gets rolling much quicker than if you take everything on yourself. Needless to say, winding up your company right at the start of the three-year window will be more to your benefit than leaving it last minute.

Clarke Bell can help

If you are considering closing your company, don’t go it alone; let Clarke Bell be there to help. We have more than 28 years of experience in helping both solvent and insolvent companies close in the best way possible, and we can do the same for you. Our team of experts can help make sure you don’t miss that three-year window and the benefits of BADR, or assist your company in a range of other ways. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.