Extracting the retained profits from a Limited Company


 - a legal FAQ from egos®


IMPORTANT – Change now implemented following Budget 2012: 

 

ESC C16 has now been replaced by s1030A Corporation Tax Act 2010 (introduced by The Enactment of Extra-Statutory Concessions Order 2012.

 

This restricts the total amount that can be taken as a capital distribution (to which CGT / ER will apply) without going through a formal liquidation procedure (and with the associated cost) to £25k. 

 

If there is more than £25k retained profit in a company, care needs to be taken to avoid it all being subject to IT at your highest rate.

 

We can advise and help you to identify the route best suited to your situation.

 

 

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 HMRC 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 what is now s1030A (which can allow total distributions of no more than £25k on dissolution to be treated as a capital gain)

 

      there are still some potential anti-avoidance pitfalls which need to be steered clear of, and these are now less obvious than they were under ESC C16

 

      annual CGT exemptions and CGT loss relief are available, to the extent that they are unused elsewhere

 

      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 rate of 18%

 

      there is some advantage to planning ahead (eg it may be possible to spread the capital distribution over 2 tax years, and so claim 2 years’ annual CGT exemption)

 

Option 3      (closedown only) – put the company into formal members voluntary liquidation 

 

      this requires the engagement of a liquidator, at a cost.  It takes a little time 

 

      there are still some potential anti-avoidance pitfalls which need to be steered clear of

 

      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 rate of 18%

 

      there is some advantage to planning ahead (eg it may be possible to spread the capital distribution over 2 tax years, and so claim 2 years’ annual CGT exemption).

 

Where there is more than one shareholder, the consequences for each need to be considered separately, before a reasoned decision can be taken as to the best overall approach.

 

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 it is wise to evaluate all the options, and consider anti-avoidance provisions.

 

We have developed a tool which helps us to assess each possible option, taking into account the position of each shareholder, and thus to help us put you in a position to take an informed decision as to your best route forwards.

 

For more details, please download and complete this form, and mail it back to us.

 

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 closing down the company 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.

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