Yes, closing your contractor company and carrying on with the same work within two years can cost you capital treatment. The winding-up TAAR in section 396B ITTOIA 2005 turns the distribution into an income dividend where four conditions are all met, and for a contractor company the live one is Condition C: within two years of the distribution, the same or a similar trade or activity is carried on by you, by a partnership you belong to, by a company in which you hold at least 5%, or by someone connected with you. Condition A, a 5% interest immediately before the winding up, and Condition B, that the company was close, are met by almost every personal service company as a matter of fact. So the decision is not really strike-off against liquidation. It is whether you are finished with the trade.
What does Condition C actually catch?
The continuation of the activity, in any wrapper. The test in section 396B is whether a trade or activity which is the same as, or similar to, that carried on by the wound-up company is carried on within two years beginning with the date of the distribution. Nothing in it turns on whether a new limited company is used. A contractor who liquidates a development consultancy and then delivers the same development work through an umbrella, through an agency PAYE arrangement, or on a client's own payroll, is carrying on the same activity. The legislation then widens the net by naming the people whose involvement counts: the individual, a partnership the individual is a member of, a company in which the individual has at least a 5% interest, and a person connected with the individual. Invoicing through a spouse's company is inside the rule, not outside it.
What counts as the same or similar trade for a contractor?
Similarity is judged on the substance of the work, not on the client list or the job title. Different end clients do not make it a different trade. Moving from one agency to another does not. Nor does a shift from a day rate to a salary for the same skills in the same sector. What sits further away is a real change of field: a genuine move into a different discipline, an employed role of a different nature, or leaving work altogether. Between those two poles the answer depends on the facts, and the facts are the ones recorded at the time, not the ones reconstructed two years later. Anyone reading this alongside a live inside IR35 determination should look at the wider route comparison in keeping the company, closing it, or going umbrella before deciding to close.
When does the two year clock start?
On the date of the distribution. Not the date the winding up begins, not the date of the final Companies House filing, and not the dissolution date. Where a liquidator pays out in instalments, each distribution starts its own two year period, so a small final payment made six months after the main one extends the end of the exposure window by six months. That matters for sequencing: a contractor intending to return to the field should know the date of the last payment before committing to a start date, and a gap of a few months between payment and the next engagement achieves nothing by itself.
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What happens to the tax if the TAAR bites?
The amount is taxed as a dividend instead of as a capital receipt. For 2026/27 the dividend rates are 10.75% ordinary, 35.75% upper and 39.35% additional, applied after the £500 dividend allowance to the band the amount falls into. Business Asset Disposal Relief, at 18% for disposals on or after 6 April 2026 within the £1m lifetime limit, has nothing to attach to, because the receipt is no longer a chargeable gain. On reserves of £100,000 taken by a higher rate taxpayer, that is the difference between roughly £18,000 and roughly £35,750, and the liquidator's fee has still been spent. The rate detail sits in dividend tax rates for contractors.
Strike-off or MVL: does the route change the answer?
It changes the mechanics and the ceiling, and it changes which anti-avoidance rule is in point. The £25,000 figure is the limit on distributions that a voluntary strike-off can treat as capital; above it an MVL and a licensed liquidator are needed for capital treatment. Section 396B is written for a distribution in the winding up of a company, so it does not reach a voluntary strike-off, which is a dissolution rather than a winding up. That is not a reason to prefer one route. A repayment of share capital is a transaction in securities under section 684 of ITA 2007, and HMRC can counteract an income tax advantage on the same continuing-trade facts. The step by step mechanics of each route, the strike-off forms and the liquidator's process, are set out in closing a contractor limited company.
| Question | Voluntary strike-off | MVL |
|---|---|---|
| Distributions treated as capital | Up to £25,000 in total | No limit |
| Licensed liquidator needed | No | Yes |
| BADR at 18% possible | Yes, if the conditions are met | Yes, if the conditions are met |
| Winding-up TAAR (ITTOIA 2005 s.396B) applies | No, it is written for a winding up | Yes |
| Transactions in securities (ITA 2007 s.684) can apply | Yes | Yes |
| Director's loan must be cleared first | Yes | Yes |
Cross the £25,000 line and the whole amount is income, not just the excess, so the reserve figure needs to be the final one after the last corporation tax payment and after the director's loan account is settled. An overdrawn loan left running also carries its own cost: section 455 at 35.75% where the loan was made on or after 6 April 2026, and a section 458 refund that lands long after the repayment. The corporation tax side of that final period is covered in corporation tax for a contractor limited company.
What evidence should be on file before the distribution?
Contemporaneous records of why the company was wound up and what happened next. Condition D asks whether it is reasonable to assume that a main purpose of the winding up was the avoidance or reduction of a charge to income tax, and that is answered from the circumstances as they stood. A closure file that answers it holds a dated note of the commercial reason for closing, the board minute and declaration of solvency, the date and amount of every distribution, the final reserve calculation showing the £25,000 position, evidence that the director's loan account is nil, and, where work resumes, a record of how the new activity differs. Where the two year window is still open, the file also carries the date it closes. Extraction while the company is still trading, which is a different question, is set out in the director salary and dividend split.
If you are leaving contracting, the capital route is well established and the TAAR is a documentation exercise. If you expect to be doing the same work within two years, price the closure on the dividend rates rather than on 18%, and decide whether it is still worth doing at all.