Readers question: I own a limited company that is solvent and, due to medical issues, I wish to close it. My question is, as the MD of the company, can I close it and receive a tax-free redundancy payment of £30,000?
Experts answer: The expert for this readers question is Gary Addison from Redundancy Claims UK.
You are unable to take a tax-free redundancy payment because as the managing director, you can foresee redundancy.
To receive a tax-free statutory redundancy payment, a worker must:
- Have an employment contract with the employer
- Not resign or leave on their own accord, for example, must be made redundant
In reality and as a result of tax repercussions, very few contractors have employment contracts with their limited company. If a contractor has an employment contract with their limited company, it becomes the legal obligation of the limited company to pay the contractor a salary in line with the national minimum wage for the hours worked. This is a tax-inefficient way to withdraw funds from the company as it attracts a higher rate of tax than if the funds were extracted in the form of a dividend.
Choice in redundancy
However, even if a contractor satisfies the condition of having an employment contract with the limited company, they are still not eligible for redundancy pay, because as shareholder and director of the business, they would in effect be making themselves redundant. As you are making the decision to cease trading, you, therefore, fail to meet the second condition. When an employee is made redundant, they do not have a choice in whether their role continues to exist. However, in the case of where the employee is also a company director with significant control of the company, they are aware of their redundancy and therefore, will not qualify for redundancy.
HMRC would challenge a contractor making a claim for corporation tax relief for their redundancy in the company accounts. The nature of the payment would be questioned as the beneficiary would be the director and shareholder. HMRC would identify the controlling director and the employee as one as both roles are embodied by the same person and cannot be separated.
No tax-free redundancy for limited company directors
In conclusion, shareholder directors of solvent limited companies are not eligible to receive tax-free redundancy payments and the company cannot claim Corporation Tax relief on any payments made.
On the other hand, if your limited company is financially struggling and enters liquidation or administration as a result, you may be eligible to claim redundancy pay. If the business has been trading for over two years and you have been paid through PAYE, you may be able to claim redundancy. This will be determined by your years of service, gross wage and the timeframe from when your company was liquidated.
More on closing your company and tax tips for limited company owners.
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