MVL and ER after new HMRC policy

[Fred Bloggs]

However remember if you do become resident in the UK again within 5 years HMRC will still come after you for the tax on dividends as if you hadn't left.

(And very soon all the OECD countries will be sharing huge amounts of financial information about individuals with each other so the days of people being able to hide things that happened overseas has long gone)

Exactly, that's why I said leave permanently or long term with no intention to return.

[WordIsBond]

@WordIsBond, At first sight it might seem I would be alright, but reading that and some other documetns I see that the main intention of HMRC is to
discorage contractors from making funds distribution decisions based on tax-advantage, I built up that sum because I was ignorant about how things work
and I also didn't have any reason or need to move the funds out of the Corporate account, it has been giving me an interest in the high interest accounts
so, why to move it out? My concern is HMRC to don't see it that way, and think I have just taken advantage of the rules and waiting to withdraw the money
when closing the company and getting the ER. Maybe I'm a bit paranoid, but the difference could be a quite big amount of money, so better safe than sorry!

Let's just set aside what HMRC wants to discourage for a minute and look at what it actually says. This was a proposal, but it has taken effect virtually in this form. The proposal added three conditions:

Legislation will be introduced in Finance Bill 2016 to amend ITTOIA and implement a new TAAR. The TAAR will treat a distribution from a winding-up as if it were an income distribution for the purpose of section 1000 CTA 2010 where certain conditions are met.

These conditions are:

• an individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up
• within a period of two years after the distribution, S continues to be involved in a similar trade or activity
• the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage

In the legislation, all three conditions must be fulfilled for there to be a problem. Let's look at them.
1. You are an individual (S) shareholder in a close company (C) and would receive from C a distribution in respect of shares in a winding-up. This clearly would apply to you.
2. You would not be returning to IT contracting in the UK within a period of two years after the distribution, so you would not be involved in a similar trade or activity. Condition two fails and so you are in the clear. If your intent changes and you return to IT contracting in the UK, however, you could fall afoul of this provision.
3. The circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage. The main purpose of the winding up is that you are no longer trading, have no intent to return to trading, and are going abroad. I suppose if you go abroad for two months and then come back to the UK, you could fall afoul of this one as well, because they could say you didn't really wind up to go abroad, since you only were gone for a relatively short holiday. But if you intend to be abroad for an extended period and may never return, you are definitely in the clear.

Point #3 is often misunderstood. ER is ALWAYS used to gain a tax advantage. It's INTENDED to be a tax advantage. But point #3 does not say the main purpose of using ER is to gain a tax advantage. It says the main purpose of winding up the company is to do that. Anyone who shuts down their company because they are going abroad is going to have a very easy time answering the charge that the purpose of the winding up was a tax advantage. "No, you idiot, I wound up the company because I was leaving the bloomin' country."

If your original post is accurate, and this is not just a 2-3 month holiday followed by a return to contracting, it looks pretty clear to me.

[ASB]

2. You would not be returning to IT contracting in the UK within a period of two years after the distribution, so you would not be involved in a similar trade or activity. Condition two fails and so you are in the clear. If your intent changes and you return to IT contracting in the UK, however, you could fall afoul of this provision.

But this is the bone of contention. Personally I am inclined to agree that the distinction between doing something as a permie and as a contractor is fundamentally different and outwith the "same activity" clause.

I'm an IT architect. I used to ply my trade through my company, drumming up business as I was able to do so. I am now a permanent IT architect. I could see HMIT trying to argue it was the same trade. It certainly isn't. But it is undeniably the same activity. So there is risk.

Where there is a much greater risk may well be if the permie job just happens to be with a recent/major previous client.

I guess we'll never really know till it's tested.

[WordIsBond]

But this is the bone of contention. Personally I am inclined to agree that the distinction between doing something as a permie and as a contractor is fundamentally different and outwith the "same activity" clause.

Well, actually, it as "a" bone of contention, but I'm not sure you are raising a relevant bone of contention to the OP at all. He didn't say he'd be coming back into IT in the UK as a perm. He just said he wouldn't be returning to UK contracting. I don't know if that meant he is going to try contracting abroad, or he wants to come back to a perm role, or he's going to join MI6 and end up dead in a suitcase. The question you raise only applies if he intends to come back to a permie role in the UK in IT. Otherwise, it's moot.

I think the bone of contention you are raising is overblown, though. In most cases, if someone closes their company to take a permie role, condition 2 is going to be irrelevant, because they will be in the clear on condition 3. If you closed your company to take a permie role, it is really, really easy to claim that the winding up of the company was NOT primarily to gain a tax advantage. It was primary because you simply weren't contracting anymore, you didn't need the company, you didn't want to keep paying accountancy fees, there was no reason to keep it in existence, so you wound the thing up.

The restriction only applies if all 3 conditions are met. If you go take a permie role for 3 months and then decide to go contracting again, HMRC probably won't have too much trouble convincing a tribunal that it was all about tax. If you take a permie role and stay permie for 18-24 months or longer, the tribunal is likely to laugh in their faces if they try to claim you only closed the company to gain a tax advantage. You closed it because it wasn't trading anymore, and wasn't going to be for the foreseeable future.

[Maslins]

I think the bone of contention you are raising is overblown, though. In most cases, if someone closes their company to take a permie role, condition 2 is going to be irrelevant, because they will be in the clear on condition 3. If you closed your company to take a permie role, it is really, really easy to claim that the winding up of the company was NOT primarily to gain a tax advantage. It was primary because you simply weren't contracting anymore, you didn't need the company, you didn't want to keep paying accountancy fees, there was no reason to keep it in existence, so you wound the thing up.

FWIW the response we got to the consultation a while ago re a contractor going permie basically tallied with the above. Ie his opinion (and whilst he works for HMRC so is "inside", it's just one opinion) was that the situation would potentially fail point 2 but would be clear on point 3.

...but yes, for this specific thread don't think there's any suggestion of the OP taking on a permie role soon after in the UK, but I appreciate sometimes significant facts can be omitted.

[WordIsBond]

So you're saying I think like someone who works for HMRC? Not sure that's a compliment....

[aoxomoxoa]

...but yes, for this specific thread don't think there's any suggestion of the OP taking on a permie role soon after in the UK, but I appreciate sometimes significant facts can be omitted.

Indeed the OP didn't mention this as a possible scenario, but I did, so I would assume the clarification is to my point rather than the OP's.

[ITContractor82]

@Fred Bloggs, thanks again, I have been thinking about this but it also has it's problems, first is that it seems I would need to do the expat self assessment in the UK as a Ltd Director
and because of this I would need to pay in origin as per UK rules, maybe a 7,5% up to 32k is not that but if I'm living in Panama and paying a 0% extra. But I would need to do it
for several years, so this route in somehow put me behind the bars, because I would need to be looking at taxes system wherever I go and also during several years, complicated and
time consuming. Or at least that my view now, also a lot of uncertainty.

@dingdong, ok, I didn't know this but this also discourages me from taking that route, plus I don't know if after come from living in an tax haven for some time I will be highly scrutinized by HMRC
or the equivalent organism in whichever country I end up...

@WordIsBond, this is a very good appreciation you are making here, those three rules are the way they are going to measure who are the good and the bad guys. Or at least it's going
to be an important way to make decisions, even with that I don't think HMRC couldn't pursue cases not meeting the 3 rules... but in my case I for sure will not met the second one and
in my opinion also not the third but that one is a more subjective one.

To make clear my intentions, my plan is to leave the UK and start to travel the world, whenever I'm tired of that (1 month or 10 years) I will go to the country in the world
I liked the most (not UK) and start doing something probably not even related with the IT consultancy that is my area right now, so for sure condition 2 doesn't apply to me!

Reading your answers, talking to a couple of accountants, doing some calculations and bearing in mind the risk and probability of the different options I think the most
sensible approach is to close now the company through the MVL process, take the money, apply for the ER in the next SA and cross my fingers hoping HRMC doesn't raise an
investigation on me for this TAAR rules and/or IR35, in any case, for both things I have QDos insurance and some good chances of defending myself successfully, maybe a bit
worst position on IR35, but also closing the company now is better than keep it open during the next 5 ot 10 years as I have been told once it's closed it's quite difficult they
look at it.

That's my reasoning, thanks a lot for your comments and ideas they were very helpful. And of course I still open to new feedback!

Kind regards.


PD: I hope not to end up in a suitcase but a role in MI6 would be fun for sure

[Pegasus]

Well, actually, it as "a" bone of contention, but I'm not sure you are raising a relevant bone of contention to the OP at all. He didn't say he'd be coming back into IT in the UK as a perm. He just said he wouldn't be returning to UK contracting. I don't know if that meant he is going to try contracting abroad, or he wants to come back to a perm role, or he's going to join MI6 and end up dead in a suitcase. The question you raise only applies if he intends to come back to a permie role in the UK in IT. Otherwise, it's moot.

I think the bone of contention you are raising is overblown, though. In most cases, if someone closes their company to take a permie role, condition 2 is going to be irrelevant, because they will be in the clear on condition 3. If you closed your company to take a permie role, it is really, really easy to claim that the winding up of the company was NOT primarily to gain a tax advantage. It was primary because you simply weren't contracting anymore, you didn't need the company, you didn't want to keep paying accountancy fees, there was no reason to keep it in existence, so you wound the thing up.

The restriction only applies if all 3 conditions are met. If you go take a permie role for 3 months and then decide to go contracting again, HMRC probably won't have too much trouble convincing a tribunal that it was all about tax. If you take a permie role and stay permie for 18-24 months or longer, the tribunal is likely to laugh in their faces if they try to claim you only closed the company to gain a tax advantage. You closed it because it wasn't trading anymore, and wasn't going to be for the foreseeable future.

Hi WiB,

One basic question regarding liquidation (different from what OP asked originally) - I understand now that once the ER is approved, the money can be taken out as capital gains by paying 10% tax.

If the ER is not approved, are we still able to take the money out as capital gains by paying normal 18% capital gains tax (or whatever the current capital gains tax rate is)?
Or does it mean that we can't take it out as capital gains at all, and will need to extract as dividends at 32.5%?

Many thanks.

[Maslins]

One basic question regarding liquidation (different from what OP asked originally) - I understand now that once the ER is approved, the money can be taken out as capital gains by paying 10% tax.

If the ER is not approved, are we still able to take the money out as capital gains by paying normal 18% capital gains tax (or whatever the current capital gains tax rate is)?
Or does it mean that we can't take it out as capital gains at all, and will need to extract as dividends at 32.5%?

I don't think it works in the way you suggest. There is no advanced application for ER.

If you put the company into liquidation, the liquidator will distribute funds to the shareholders. These will be taxable on the shareholders as capital gains, unless the above discussed anti avoidance legislation bits, in which case they'd be taxed as dividends.

Assuming they are taxed as CGT (ie don't fall foul of anti avoidance rules), then independently of that, the shareholders/accountant should assess whether the shareholder/company meets the criteria for entrepreneurs relief. For most contractor type businesses they should, providing the company was trading at least one year.