Tax fears trigger rise in solvent businesses closing
A record number of UK company directors closed solvent businesses in the three months to September, prompted by fears of tax changes and the economic damage wrought by the pandemic.
Figures from The Gazette, the official public record for the UK, found 3,126 businesses voluntarily appointed liquidators during the third quarter of 2020, the highest for any third quarter since 2000. The figure was up 52 per cent on the same period in 2019, when 2,058 businesses voluntarily appointed liquidators.
Advisers attributed the surge in closures of solvent companies to potential increases in capital gains tax (CGT), concerns about upcoming changes to the off-payroll working (IR35) rules and ongoing economic uncertainty.
Matt Howard, a partner at Price Bailey, an accountancy firm, said he was seeing a “flood” of inquiries from business owners concerned about CGT rises seeking voluntarily to cease trading and cash out.
“Many business owners adopted a wait-and-see approach during the early stages of the pandemic but, as the crisis has worn on and the economic outlook has worsened, increasing numbers are taking matters into their own hands,” he said. “They believe they are facing a stark choice between either shutting down now and taking some money or hanging on and potentially running up losses.”
A review commissioned by Rishi Sunak, the chancellor, recommended that the government should consider aligning the CGT rate more closely with income tax rates. It also suggested the government think about taxing earnings retained in companies by owner-managers as income. The review also questioned the effectiveness of entrepreneurs’ relief — recently renamed “business asset disposal relief”.
The latter fixes at 10 per cent the level of CGT that business owners are required to pay when selling their businesses, up to a lifetime limit of £1m.
In general, CGT is charged on gains at 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers. Income tax is charged at a basic rate of 20 per cent, rising to 40 per cent and 45 per cent for higher-rate and additional-rate taxpayers.
R3, the insolvency and restructuring trade body, attributed the rise in voluntary liquidations to the pandemic’s impact on trading conditions — which it said was causing directors to bring forward retirement.
John Bell, director and founder of insolvency practitioners Clarke Bell, said he had seen an increase in inquiries from people wanting to close their businesses because of IR35 changes.
The changes will require medium-sized and large businesses to assess the tax status of all contractors they hire who work via their own limited company. The changes were originally due to come in from April 2020, but were pushed back to April 2021 because of the pandemic. Before the delay was announced, several companies said they would stop hiring contractors who worked through limited companies for fear of getting the rules wrong.
“Limited company contractors have had a punishing year,” Mr Bell said. “They have had no support from the government through the pandemic and Brexit and off-payroll [rule changes] will add little comfort to them as we head into a new year.”
He anticipated seeing more contractors opting to go into voluntary liquidation in the coming weeks and months.