IMPORTANT
- Budget 2012:
Proposed legislation published
December 2011 and intended to be part of the Finance Act 2012 will restrict the
amount that can be taken as a capital distribution (to which CGT / ER will
apply) to £25k – the remainder will be treated as income and subject to
IT. Doubtless there will be accompanying
anti-avoidance provisions. If there is
more than £25k retained profits in a company that you are thinking of closing,
it may be wise to ACT NOW, whilst the amount that can be taken as a capita!
distribution has no specific upper limit.
The new rules are likely to apply
to distributions actually made on or after 1-3-12 – so the window of
opportunity is closing by the day and if you want to take advantage of the
opportunity YOU NEED TO ACT NOW!
Goalposts
moved October 2011:
A change in practice announced by
the Treasury Solicitor’s department on 13th October 2011 now means
that it is now also necessary to reduce the issued share capital to a nominal
value before closing a company down by this route. It’s not a big problem, but must be done in
the right way. We include helping with
this as part of our service.
It is
generally accepted by professionals specialising in this field that, other
considerations permitting, it is wise for the Contractor to change his/her
company every few years, in order to help close the door on risks of backwards
investigations (particularly in relation to expenses & IR35), and thus
significantly help in ring-fencing today’s profits against the risks of
yesterday, and reducing the risks of personal claims by the IR against the
directors arising under PAYE.
Whilst at
present s660A appears to raise less concerns following the final disposal of
the Arctic appeal in July 2007, it should not be disregarded, and the goalposts
may well move again with 'income shifting' rules. Viewing the position
overall, such a close-down and restart can also often offer opportunity for
restructuring in a more secure way.
Where there
are accumulated profits in the company, a greater need for the security of such
ring-fencing may be felt, together with a natural desire to extract those
accumulated profits; there is also the disincentive of the potential tax
consequences of extraction. Extraction of retained profits into a safer
environment may be wise, whether or not accompanied by a close down.
As we see
it, there are generally the following options:
Option
1 extract as dividend – tax bill for 25% of the
extracted surplus (may equally be expressed as 32.5% of the grossed up
dividend), assuming shareholder(s) already in higher rate tax bracket –
more if in the 50% bracket - this approach may be taken to extract the profits,
whether or not the company is closed down.
Option
2 (closedown only) - take advantage of ESC C16 (which,
provided certain hoops are jumped through at the appropriate times, can allow a
distribution on dissolution to be treated as a capital gain); annual exemptions
are available, to the extent that they are unused. Enterpreneur’s
Relief may be available (see notes below) - Where
shares have been held for more than 1 complete year, and other applicable
conditions are satisfied, the applicable tax rate may be 10% and not the basic
CGT rates of 18-28%.
There may
be other options - much depends on details which change from situation to
situation, and on the wishes and intentions of the individual(s)
concerned. For example, overseas connections / future intentions can open
up other avenues.
In general
terms, where the company is to be closed
down, then (assuming full Entrepreneur’s relief is available -
which should not be taken for granted), then it is generally wise to do
so making use of ESC C16. The qualifying
requirements and the procedure are both relatively straightforward – but
it does need to be approached in the right way.
For more details, please mail
us, and give the following initial information:
1 approximate
amount of surplus in company?
2 How many shareholders does the company
have?
3 In relation to each shareholder,
3a what shareholding does that shareholder
have?
3b How long has the shareholder held the
shares?
3d has the shareholder made any previous
claims for Entrepreneur’s Relief? If so,
in respect of how much capital gain (NB the gain,
not the tax) in total?
4 Are
any of the shareholders married to each other?
5 Has
the company been active throughout the period since its formation? If not
please give details of all inactive period(s)?
6 What
is the general nature of the company's business?
7 Is
it intended that the business itself will be continued after the company is
closed down? If so, who will operate it on an ongoing basis?
8 how
much is the company’s issued share capital?
We will
respond promptly, and will give an indication of how we may be able to help,
and (if so) tell you what is required to take it a stage further.
Advice on
availability of Entrepreneur’s Relief is
also available - mail
us, and please let us have the information as listed above.
Emigrating
- or going home?
Finally, if
your planned company closure is intended to synchronise with moving to another
country, there are other considerations to take into account.
There are
particular angles to consider for those returning to Australia.
We can help
with all the situations.
Note on Entrepreneur’s relief: The effectiveness of the ESC C16 route
depends on whether or not full Entrepreneur’s relief is available.
Entrepreneur’s relief is available
on qualifying business disposals by individuals - in the case of shares in an
unlisted company, this requires the company to be a ‘trading company’.
Where at least 5% of the issued shares in a company, carrying at least 5% of
the voting rights, have been held for more than one complete year, and the
individual has been an officer or employee of the company throughout that
period, then on the face of it Entrepreneur’s Relief is available. Whether or not a company is a ‘trading
company’ depends on rules similar to those which formerly applied for business
asset taper relief.
The consensus amongst professionals
appears to be that there is unlikely to be a problem with the Revenue accepting
that a company is a trading company where
The further one steps outside those
boundaries, the greater the risk that Entrepreneur’s Relief may not be
available; each case needs to be considered on its merits. Time is
also a consideration, where a company has in effect ceased to trade – the
longer one leaves it, the harder it may be to justify a position that the
company remains a ‘trading company; for these purposes.
It is NOT generally possible to
apply in advance for Revenue clearance to plans on this issue before committing
oneself to implementing them.
If you are an accountant reading
this page and have any useful information from your own experience on the
point, I'd much appreciate you sharing the information with me.
I'd really appreciate your feedback
on this FAQ - so mail me and tell me what
you think of it, if it's been useful to you, or let me know of any specific
problem you have where I may be able to help.
This page was last updated on 12th
January 2012
No liability is accepted for any
inaccuracy in the information in these pages - see full
disclaimer
Copyright © 2004-11 Egos Consultancy
Ltd – ecl@egos.co.uk All
rights reserved - see full copyright details
The information on these pages is provided free and for information
only, and is provided 'as is'. Whilst believed to be correct, it is in no way
comprehensive. It is provided for your interest only and is not intended to be
relied on as formal legal advice. The posting of information on these pages is
not intended to create a lawyer-client relationship, and you should not act or
rely on this information without seeking professional advice. No liability is
accepted therefore for any errors, or for any losses that may be incurred if it
is relied on.
You may read these pages on-line, and download them to read later, for
your own personal use.
This copyright notice must appear on every page that you print from here.
You must not redistribute these pages or any part of them in any form or medium
without first obtaining my consent.
You are welcome to set up links to this website from others.