Post MVL opportunity - too risky?

[JB3000]

I don't believe there is any definitive guidance on this subject, and a quick search didn't through anything up new so I'd appreciate views on my situation.

- My business stopped trading in February after one of my clients made me an offer to go permanent.
- The offer was good, so I took it, and therefore had no reason to continue running my business.
- An MVL was the sensible option given the retained profit in the company
- Liquidator appointed, funds have been distributed to the shareholders, company shows as 'In Liquidation' at Companies House, hasn't been struck off yet.

Some 6 months or so later, and rather out of the blue, I have been approached for a contract role via an old contact who recommended me for the project. The client is "new" - my old company did not do business with them, nor does my current employer.

If I were to be able to negotiate a suitable contract (that's another story!), and assuming I do all the sensible things like not having a similar company name, not selling my old company assets to the new company and so on, is "Transactions in Securities" an issue that I need be unduly worried about?

"An ordinary liquidation (in which a company is wound up following the complete cessation of its business or the transfer of that business to a person unconnected with its original shareholders) is not within the scope of this avoidance legislation. This legislation can however apply to counteract a tax advantage obtained in consequence of the combined effect of a transaction in securities and the liquidation of a company."
Source: CTM36850 - Particular topics: transactions in securities: liquidation

In other words, if there is complete cessation of trade then there are no issues with liquidating a company and enjoying a 10% tax rate.

So the question is what does "complete cessation" actually mean?

"Where, however, the new activity is similar in scale and nature to the old, it is relevant to look at all the circumstances in which the break occurred, including the length of the break and the intentions of the business proprietors (as shown by their actions) at the time the earlier activity ceased (Kirk & Randall Ltd v Dunn [1924] 8TC663; Goff v Osborne & Co (Sheffield) Ltd [1953] 34TC441; J G Ingram & Son Ltd v Callaghan [1968] 45TC151; Robroyston Brickworks Ltd v CIR [1976] 51TC230)."
Source: Business changes: cessation: break in activities

In the OP's situation it is quite easy to argue that trade has not completely ceased. This is demonstrated by how quickly the contractor has gone back to contracting and other similarities, e.g. new company is likely to have a similar principal activity to the old company. Length, terms and financials of the new contract are also likely to be similar to previous contracts in the old company. Fundamentally and substantially there has been absolutely no cessation of trade. Using completely different company names, buying a new computer and new mobile phone, taking an extended holiday and/or working as a permie for a few months is merely window dressing at best.

Consequently a tax advantage received through liquidation should, of course, be blocked by the transactions in security rules.

The remaining funds in the first company should have been taken out as dividends when that company closed and not as a capital distribution as trade had not completely ceased. Funds should only be extracted as a capital distribution where there is a genuine cessation of trade, e.g. as a result of retirement, the sale of a business, etc. The capital distributions rules are not their to be abused by nano-businesses (contractor companies) trying to pull a fast one, e.g. pretend that income earned over a few years is capital just because they want their hands on the funds. And then shortly return to contracting all over again.

I'm honestly stunned by the cavalier attitude, naivety, ignorance and unethical comments of many of the posters within this thread. This is not a question of appetite to risk as some "accountant" put it, this is a question of doing the right thing and following the law. Accountants should not be aiding and abetting.

[TheCyclingProgrammer]

Don't agree with much of the above to be honest, but does anybody know if the HMRC manuals have been updated for the most recent legislation changes? The escape clause I mentioned before puts the burden of proof on the taxpayer yet this article claims that under the revised legislation the onus is on HMRC to show that the main purpose of the transactions were to obtain a tax advantage:

http://www.bloomsburytaxonline.com/t...-two-years-on/

If one closes down their company and takes a capital distribution as they are returning to a full time permanent position then IMO thre is a clear genuine purpose to the transactions and it's down to HMRC to show otherwise.

Rules like his exist to stop people from using artificial arrangements to gain a tax advantage, I.e. liquidating then carrying on as normal with NewCo. I don't think they exist to stop people who have genuinely stopped trading but then decide to trade again at some point in the future.

[TheCyclingProgrammer]

One thing that hasn't been mentioned is applying to HMRC for clearance. If you really want to ensure you won't be caught by the legislation, you can ask HMRC for clearance which essentially means they won't seek to apply the TIS legislation to your particular case.

CTM36880 - Particular topics: transactions in securities: clearance applications under ITA07/S701 and ICTA88/S707

It could of course backfire if they don't give you clearance but OTOH you'll then have certainty and should clearance be refused you can find another way of doing business.

Good article here:
http://www.taxation.co.uk/taxation/A...t’s-over

[Craig at Nixon Williams]

For the most part, I agree with what has been said by JB3000, his points show how I would expect HMRC to interpret the various laws surrounding this situation if a case like it went to tribunal.

However, I disagree with the sweeping comment about accountants towards the end of the post – although I do agree that some (but not all) in this forum did not appear to give consideration to the fact that HMRC may look at this arrangement. If there is a certain outcome to a set of circumstances then it is the accountants role to outline this and deter the behaviour if it is unlawful or could have a negative impact on the client. If the outcome to a set of circumstances is unknown, then it is the accountants job to outline the risks and possible outcomes in order to aid the director to make their decision – their decision will then depend on their perception of these risks.

In this case the legislation is a risk because the outcome is unknown, and will continue to be unknown until it has been tested at tribunal or in a court of law.

In the case of the OP, it seems that he has closed the business with genuine intentions – this is a huge contrast to some posts often seen on this forum where people ask if they will get a tax advantage if they close down, take a break, go travelling and then set up again. It is these situations where the arrangement is artificially engineered in order to make it look like they had an intention simply to gain the tax advantage that would best be described as “window dressing”.

As I have maintained throughout this thread, TIS cannot be simply put to one side and should be considered by the OP, but the way in which he decides to proceed will ultimately depend on how his own perception of the legislation.

[Maslins]

Well, until this gets challenged, none of us will know...and of course even once it does get challenged, that will set a precedent only for those specific circumstances. Inevitably other cases will be slightly different. The first IR35 case hardly made it crystal clear for all contractors from then on.

@JB3000 - where rules are grey, IMO it does come down to attitude to risk. This thread is evidence nobody knows for sure, so how do you suggest accountants should respond? They look at rules, give it some thought based on experience, and make a suggestion potentially with a caveat that others might interpret it differently. If they consider the risk particularly low they might not even mention it. It's typically not helpful to clients if you tell them 100 things extremely unlikely to apply, but mention them just in case.

The HMRC quote re continuing/cessation, whilst potentially it could be applied to this, seems written for loss relief. Eg company X makes a loss then stops for a while. It then starts up again and is profitable. Can they use those historic losses against the new profits? I imagine in those cases, things like branding/assets would be considered in any argument.

I will eat someone else's hat (I don't have one) if Crossroads gets challenged under TIS and loses. My "confidence" on this is based largely on the vast difference between HMRC's example of a case that would be caught, and the situation Crossroads described...it's not just a "he'll probably get away with it" attitude.

[TheCyclingProgrammer]

In this case the legislation is a risk because the outcome is unknown, and will continue to be unknown until it has been tested at tribunal or in a court of law.

Would it not seem prudent then, if there is an unknown risk but the intentions are genuine, to recommend that a client seeks clearance from HMRC? At least that way you know where you stand before you do anything. If HMRC come back to you with approval then there is no longer a risk.

The downside I guess is if your situation was borderline; not informing HMRC would probably mean you'll go under their radar but applying for clearance and having it refused means if you then proceed they are almost certain to pursue anti-avoidance.

But if certainty and risk management is what you want - rather than just hoping you'll get away with it - it seems a no-brainer.

[Maslins]

Would it not seem prudent then, if there is an unknown risk but the intentions are genuine, to recommend that a client seeks clearance from HMRC? At least that way you know where you stand before you do anything. If HMRC come back to you with approval then there is no longer a risk.

The downside I guess is if your situation was borderline; not informing HMRC would probably mean you'll go under their radar but applying for clearance and having it refused means if you then proceed they are almost certain to pursue anti-avoidance.

But if certainty and risk management is what you want - rather than just hoping you'll get away with it - it seems a no-brainer.

I kind of agree. One question would be when do you apply. Realistically it shouldn't be before the liquidation starts or in the very early stages of liquidation...as if at that point you're already considering restarting it begs the question why are you liquidating (if not for tax breaks).

Presumably therefore it should be broadly at the position the OP is in now. When liquidation was done, hadn't planned to contract again, but that plan has now changed, want to know whether the rules will bite.

Problem in my mind of applying for clearance, is you're effectively admitting you think your case is at least borderline. If you were completely confident in your position, you wouldn't ask in the first place, you'd just do it.

It depends how cynical you are around clearances. Ie do HMRC basically offer it to encourage you to tell them about even slightly contentious things which they can then treat as admission of guilt by you? I think the reality isn't that bad, but I'm sure it'd be a concern of many.

[TheCyclingProgrammer]

I kind of agree. One question would be when do you apply. Realistically it shouldn't be before the liquidation starts or in the very early stages of liquidation...as if at that point you're already considering restarting it begs the question why are you liquidating (if not for tax breaks).

Presumably therefore it should be broadly at the position the OP is in now. When liquidation was done, hadn't planned to contract again, but that plan has now changed, want to know whether the rules will bite.

Problem in my mind of applying for clearance, is you're effectively admitting you think your case is at least borderline. If you were completely confident in your position, you wouldn't ask in the first place, you'd just do it.

It depends how cynical you are around clearances. Ie do HMRC basically offer it to encourage you to tell them about even slightly contentious things which they can then treat as admission of guilt by you? I think the reality isn't that bad, but I'm sure it'd be a concern of many.

If I was OP, I personally wouldn't bother applying for clearance as I'd be fairly comfortable with the level risk if I shut down the company for genuine reasons.

My understanding is that clearance can be applied for both before and after a transaction in securities. Isn't it the case that the liquidation in itself is not a transaction in securities? My understanding was that it was the subsequent re-incorporation and transfer of assets (including trade) from old to new co that was the transaction in securities that could potentially trigger anti-avoidance provisions.

On that basis, yes I agree that now would be the time for OP to apply for clearance if he chooses. Whatever the decision, it will have no bearing on the liquidation already done, it just means that if clearance is refused they won't be able to start up a new Ltd company at this point in time without being at high risk.

I see what you're saying though - I have no idea what HMRC's attitude is to clearance so if I was considering it I guess I'd be relying on my own accountants advice here.

[JB3000]

Well, until this gets challenged, none of us will know...and of course even once it does get challenged, that will set a precedent only for those specific circumstances. Inevitably other cases will be slightly different. The first IR35 case hardly made it crystal clear for all contractors from then on.

@JB3000 - where rules are grey, IMO it does come down to attitude to risk. This thread is evidence nobody knows for sure, so how do you suggest accountants should respond? They look at rules, give it some thought based on experience, and make a suggestion potentially with a caveat that others might interpret it differently. If they consider the risk particularly low they might not even mention it. It's typically not helpful to clients if you tell them 100 things extremely unlikely to apply, but mention them just in case.

The HMRC quote re continuing/cessation, whilst potentially it could be applied to this, seems written for loss relief. Eg company X makes a loss then stops for a while. It then starts up again and is profitable. Can they use those historic losses against the new profits? I imagine in those cases, things like branding/assets would be considered in any argument.

I will eat someone else's hat (I don't have one) if Crossroads gets challenged under TIS and loses. My "confidence" on this is based largely on the vast difference between HMRC's example of a case that would be caught, and the situation Crossroads described...it's not just a "he'll probably get away with it" attitude.

Just because there is a low risk of HMRC finding out that some contractors are inside IR35 doesn't mean contractors should prepare their taxes outside of IR35! Just because something is low risk and therefore you are likely to get away with it doesn't mean it is right and should be done. The rules and law are there for a reason and should be followed accordingly.

The OP is going back to contracting very quickly and the new nano-business will virtually operate in an identical way to the former nano-business. There has been no genuine cessation of trade. Working as a contractor via a limited company is going to be an ongoing thing for him and he's likely to be dipping in and out for the rest of his professional career.

The first things HMRC will look at is:

"Where, however, the new activity is similar in scale and nature to the old, it is relevant to look at all the circumstances in which the break occurred, including the length of the break and the intentions of the business proprietors (as shown by their actions) at the time the earlier activity ceased (Kirk & Randall Ltd v Dunn [1924] 8TC663; Goff v Osborne & Co (Sheffield) Ltd [1953] 34TC441; J G Ingram & Son Ltd v Callaghan [1968] 45TC151; Robroyston Brickworks Ltd v CIR [1976] 51TC230)."
Source: Business changes: cessation: break in activities

HMRC have a track record of looking at the above details.

We are not taking about a genuine serial entrepreneur here, the OP is never going to be on the panel of Dragons Den! We are just talking about an IT contractor who will be continually contracting on and off (many of the contracts will possibly be found to be inside IR35). Fundamentally, there is no point where there has a permanently discontinuity or severance of trade and therefore a capital distribution is not due. This is basic stuff. It's not rocket science.

I wouldn't go around eating other people's hats- how will you pay them back? Should HMRC go to court on this and win that is the end of MVLO.

[TheCyclingProgrammer]

@JB3000: you seem to have conveniently ignored the point that if the intention to cease trading was for a genuine purpose other than to simply gain a tax advantage, then the anti avoidance provisions will not apply. Tax avoidance has to have been the main motivation for OP to close his company down except it clearly wasn't, it was to start a permanent job with a new employer.

Even if you could show a continuation of trade, that in itself is not enough for anti avoidance to kick in HMRC need to show that your main motivation was to shut down and start a new company later to take advantage of ER on the capital dostribution.

Maybe OP should apply for clearance and report back what comes of it. We'd all have a lot better idea of what HMRCs view on this particular scenario is then.