Here’s why dormancy might be the best option for your limited company in light of upcoming IR35 changes
Posted on 17th December 2019 at 16:26
In preparation for the upcoming IR35 changes for the private sector in April 2020, there are probably a variety of routes you’ve considered taking in order to be as minimally affected as possible by the proposed reform.
You may have thought about hanging up your contractor boots and taking on a permanent employed role, or maybe you are considering something else entirely. One option that may be the most sensible and least extreme for many contractors is placing your limited company into dormancy.
It may be more tax-efficient for you to put your company into dormancy and instead operate via an umbrella company post-April 2020, if you fancy testing the waters. This could be the best option for contractors who know they will have a different (and less lucrative) contract after the changes go ahead.
A quick reminder of what dormancy means
If you want to cease trading for now, but are not sure whether you will resume company activity in the future, it may be an option to make your company dormant.
A dormant company does not pay corporation tax because it is classed as having no significant accounting transactions. If the company undertakes any activity that isn’t permitted while it is dormant, it may be liable for additional tax.
Directors can make their company dormant when taking sabbatical leave, suffering a prolonged illness or making a temporary move abroad, amongst other reasons. Essentially, it’s the most sensible option when you’re not completely certain that you will be ceasing to trade permanently and this is why it could be ideal for contractors who are concerned about IR35.
There are no time limits for how long a company is permitted to remain dormant – but the general advice is to consider shutting it down completely if you are definitely not going to start trading again after two years. You do not have to make that decision right away, though.
To start trading again after a period of dormancy, all you need to do is inform HMRC that your company has started trading again within three months of doing so. Companies House should be contacted as well, and you can do this within nine months of the company’s year-end date. Corporation tax should be settled in this same period, with company tax returns needing to be filed within twelve months of its year-end date.
How do I register my limited company as dormant?
First of all, you will need to inform your corporation tax office that you have or are intending to cease trading. This will enable them to update your company’s records. If you haven’t already done so, the next step would be to inform your clients and chase any unpaid invoices – let that be a reminder to you to pay any outstanding invoices too, if you have any.
The next steps are to prepare all the accounts up to the financial year end date as usual, and if you had employees, inform the tax office and de-register for PAYE. If VAT applies to your company, you should de-register for that too.
As mentioned above, there are no time limits for how long a company is permitted to remain dormant but the general advice is to consider shutting it down completely if you are definitely not going to start trading again after two years. This will probably not be the case for you if you’re just doing it for a short while after the IR35 changes, though.
How do I start trading again after my company has been dormant for some time?
This is relatively simple – all you need to do is inform HMRC that your company has started trading again within three months of doing so. Companies House should be contacted as well, and you can do this within nine months of the company’s year-end date. Corporation tax should be settled in this same period, with company tax returns needing to be filed within twelve months of its year-end date.
If you have decided that making your company dormant is not the right route for you, and that you are absolutely certain you will not be trading again any time soon, you should consider whether you are going to strike off the company, or enter it into Members' Voluntary Liquidation – and both have their pros and cons.
Next steps
We can help you navigate the IR35 reforms and help put your company into a dormant state, if that is the route you wish to take. Of course, we can help you make these decisions so please do get in touch by emailing us or booking a call.
As we gradually approach April 2020 and the off-payroll working changes for the private sector edge closer and closer, it is your responsibility as a contractor and limited company director to stay on top of the ever-changing world of IR35.
To support you through the upcoming changes happening in April 2020, we have put together an IR35 Private Sector: 5-Step Action Pack, which includes:
Full written IR35 Contract Review;
30-minute debrief call with Nicola to discuss the outcome of the IR35 Contract Review and its impact on you and your limited company;
Communications Pack including email and letter templates to send to your client to get your communications started, and in the event that you need to appeal;
30-minute call to discuss your very own action plan.
We are bundling all this together for our clients for just £297 +VAT.
Learn more in this free guide we've created for you, here.
Don't wait for your client to come to you.
Be proactive, take the initiative and get planning for April 2020!
Written by:
Nicola J Sorrell -
Effective Accounting
Founder | Xero Champion | IR35 Expert
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