Post MVL opportunity - too risky?

[Craig@Clarity]

It's not a relaxed view as such. It's well thought out but to the point without getting too technical and scaring the OP.

I agree that although there maybe a gained tax advantage, it was not the primary reason for closing the company as you know.

Just relax and lay off the coffee

[Crossroads]

Thanks guys :-)

No contract agreed as yet, so it could all be hypothetical. I'd rather not be the first test case!

The way I see it...

- the company was closed for a genuine commercial reason (it wasn't needed any more)
- the method I used to extract the retained profit and close the company was the best [legal] method that returned the greatest sum to the shareholders... why would I do anything else?
- As an individual I have now been presented with a potential business opportunity. It's a new client, and any new company would have no link (assets etc) to the old one, there is no need for it.

The only link - as pointed out by Craig NW - is my somewhat dubious skillset.

[Maslins]

I think it's worth having a look an example situation HMRC give where they think TIS would apply.

"A is the sole shareholder of trading company X that has £1m cash representing its undistributed profits. A subscribes for shares in new company Y. Company X transfers its trade and assets (but not the cash) to Company Y which continues to carry on the trade.

Company X is put into liquidation and the cash paid as a capital distribution to A.

A receives a tax advantage in Circumstance D CTM36840 in consequence of the combined effect of the transaction in securities and the liquidation of a company (except to the extent that it represents the return of the amounts subscribed for the share capital in X)."

Compare that to your situation. Yes you have the same skill set...but if HMRC were to go down that route, then anyone who ever closed down two businesses in their lifetime could be argued to be using the same skill set and hence caught. I can't see that happening. I (Chris Maslin) am partially behind both MVL Online and Maslins. I arguably use the same skill set in both, accountancy/tax knowledge (inevitably with some soft marketing/IT/whatever skills)...but I can't imagine anyone would try to argue they're the same business. Ok, you're in a different situation, but I think the logic transfers.

I think you have no real risk...but yes, this is just my humble opinion.

[Crossroads]

Thanks Chris - your opinion is along the same lines as my thoughts that if the "skill set" of an individual was the determining factor then it would result in a net cast so wide that virtually every multi-company Director would be caught.

[Craig at Nixon Williams]

Compare that to your situation. Yes you have the same skill set...but if HMRC were to go down that route, then anyone who ever closed down two businesses in their lifetime could be argued to be using the same skill set and hence caught. I can't see that happening. I (Chris Maslin) am partially behind both MVL Online and Maslins. I arguably use the same skill set in both, accountancy/tax knowledge (inevitably with some soft marketing/IT/whatever skills)...but I can't imagine anyone would try to argue they're the same business.

I disagree with your analogy as your two businesses deliver different services and the purpose of using two separate entities to deliver these is commercial. My research may be wrong but MVL online is partly owned by an Insolvency Practitioner, and that is necessary for you to be able to trade.

Consider a different scenario:

Nixon Williams ceases to trade and starts again as Nixon Williams 2 (or something more creative), no cash is transferred, none of the same physical assets are used but the management stays the same. As for clients, even if no Nixon Williams customers go to Nixon Williams 2 but the new company markets itself at contractors then I’d suggest that the two entities would have the same trade because they would be doing exactly the same thing and the good reputation of the first company would be partly responsible for some of the success of the second company.

If we ceased trading as accountants and opened again as hairdressers, then that would be a different trade.

[ContrataxLtd]

I disagree with your analogy as your two businesses deliver different services and the purpose of using two separate entities to deliver these is commercial. My research may be wrong but MVL online is partly owned by an Insolvency Practitioner, and that is necessary for you to be able to trade.

Consider a different scenario:

Nixon Williams ceases to trade and starts again as Nixon Williams 2 (or something more creative), no cash is transferred, none of the same physical assets are used but the management stays the same. As for clients, even if no Nixon Williams customers go to Nixon Williams 2 but the new company markets itself at contractors then I’d suggest that the two entities would have the same trade because they would be doing exactly the same thing and the good reputation of the first company would be partly responsible for some of the success of the second company.

If we ceased trading as accountants and opened again as hairdressers, then that would be a different trade.

It's an interesting thread this one, always good to have a debate on something like this where it's not been tested specific to contractors and it's nice to hear the views of other accountants on the board.

My personal opinion is that there is a risk albeit a very small risk to the OP that HMRC could use the TIS rules to counter the transaction but I would find this highly unlikely to happen in reality.

To look at your example Craig (NW) I personally feel that although no physical assets have been transferred there is a transfer of goodwill associated with the brand 'Nixon Williams' (I would imagine that if Nixon Williams was put up for sale it would be valued at significantly more than it's asset value and therefor has an element of goodwill associated with the business, rather than the director's or staff) and as such the TIS rules could easily counter that.

However, apply the same logic to a contractor business (that ceased to trade some 6 months ago), there would be no goodwill associated with the business (possibly some with the director himself but that has no commercial value to anyone but him) and therefore there has been absolutely no transfer if he opened a new company down the line doing something similar and therefore very little risk of TIS.

I'm sure there will be people, maybe yourself that disagree with this view, but that's my interpretation of how things stand at the moment. But who knows with HMRC..............

Martin
Contratax Ltd

[TheCyclingProgrammer]

My personal, non professional view is that the risk is fairly minimal, but there is a risk nonetheless due to the uncertainty around if and how the legislation could apply in this scenario.

The example that Chris provided and also HMRCs guidance for when cases should be forwarded to their technical compliance team seem to emphasise that an issue arises if the transactions in securities (ie the transfer of assets and trade to NewCo) takes place prior to the liquidation of OldCo. So it might be that it doesn't apply at all in this case.

Finally, there does appear to be an escape clause such that if you can demonstrate the transactions were done for genuine commercial reasons then the anti avoidance provisions will not be applied. The onus of proof is on you, not HMRC, but I think closing down as you were genuinely ceasing business and then starting a new business 6 months later as a genuine commercial opportunity arose would show genuine commercial reasons.

http://www.hmrc.gov.uk/manuals/ctmanual/CTM36805.htm

[Maslins]

I disagree with your analogy as your two businesses deliver different services and the purpose of using two separate entities to deliver these is commercial. My research may be wrong but MVL online is partly owned by an Insolvency Practitioner, and that is necessary for you to be able to trade.

Consider a different scenario:

Nixon Williams ceases to trade and starts again as Nixon Williams 2 (or something more creative), no cash is transferred, none of the same physical assets are used but the management stays the same. As for clients, even if no Nixon Williams customers go to Nixon Williams 2 but the new company markets itself at contractors then I’d suggest that the two entities would have the same trade because they would be doing exactly the same thing and the good reputation of the first company would be partly responsible for some of the success of the second company.

If we ceased trading as accountants and opened again as hairdressers, then that would be a different trade.

Yes MVLO does have a partially different ownership (including licensed insolvency practitioner, which I'm not)...and yes, I don't think there were any tax considerations in MVLO being a separate legal entity to Maslins...so yes my analogy was a little ropey. My point was that a key person behind a business staying the same, hence having the same skill set, surely doesn't mean every business they ever run is the same business.

With your example, I still don't think there would be a transfer of "the business". I use quotation marks as of course that's the real question here...what specific identifiable things count as the business.

Let's say you didn't go for the name "Nixon Williams 2", but went for something completely different to avoid arguments of brand value being transferred. You're not using the same assets, not keeping any the clients, no brand retention. The link is same/similar staff, starting afresh going for same/similar target market. I realise we'll probably disagree on this () but I don't think that's transferring the business to a new legal entity, it's starting up a new business in the same field. This is exactly what the OP is doing. There's also a 6 month break, reinforcing the idea that it's not continuation of the same business.

Take your situation, but imagine NW was actually sold, merging into a bigger firm. Let's naively pretend there was no anti competition clause, and the key staff of NW set up again from scratch immediately trying to do exactly the same thing. Even if they did call it NW2, same staff...surely that wouldn't be a transfer of the business, as the business was sold?

Also, as TCP points out, in HMRC's example the timeline seems to suggest Newco was set up before the closedown process of Oldco started. This is of course key to the trade continuing rather than stopping.

I think the situation would have to be far more blatant for TIS to kick in than the OPs situation.

[Craig at Nixon Williams]

The point that I have been trying to make throughout this thread is that there is a risk, albeit small in reality, and that risk should not instantly be dismissed.

We do not know how HMRC would interpret the legislation in practice, so we cannot assume that anybody in the OP’s situation would be ok if they did come under HMRC scrutiny. Anybody in this situation therefore needs to be aware of the risks in order to make an informed decision that suits their risk appetite rather than simply being told to go for it.

[TheCyclingProgrammer]

The point that I have been trying to make throughout this thread is that there is a risk, albeit small in reality, and that risk should not instantly be dismissed.

We do not know how HMRC would interpret the legislation in practice, so we cannot assume that anybody in the OP’s situation would be ok if they did come under HMRC scrutiny. Anybody in this situation therefore needs to be aware of the risks in order to make an informed decision that suits their risk appetite rather than simply being told to go for it.

I don't think anybody, including OP, has denied there is some element of risk, largely due to it being a bit of an unknown.

But OPs question was is it *too risky*? Ultimately only they can decide this given the facts presented.

Is there a potential risk? Yes. Realistically are HMRC likely to be interested in OPs situation? IMO not very unless there is a tremendous amount of tax to be potentially recovered in which case it might come under closer scrutiny (but scrutiny is one thing, that still doesn't mean they would be caught).

If I was OP I would be taking practical steps to show there was no continuation of trade from the original company like not transferring old assets over but beyond that I wouldn't be worrying too much about it.

Unless HMRC start to see this as a significant problem and decided to pursue somebody and establish a precedent with a test case, it seems to me they've got far easier targets to pursue (*cough* offshore loans/EBTs etc.).