Post MVL opportunity - too risky?

[JB3000]

@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.

Any half decent lawyer would be able demonstrate that there has been no permanent discontinuity of trade, that operations in the old and new company are virtually if not completely identical, and that therefore a capital distribution is not due.

The OP is not Richard Branson or Stelios, he's just a contractor, who, because of the nature of contracting will forever be in and out of contracting as part of his career. Coincidentally each time he is out of contracting there is likely to be a 6 figure company bank balance: surprise, surprise, Cilla!

I think you have conveniently ignored when a capital distribution is due, ignored the questions HMRC are likely to ask, and the conclusions they are likely to arrive at upon asking those likely questions.

You may not have been involved in HMRC investigations, I have, and when they launch an investigation (admittedly very rarely unless you ask for a very large refund or submit a tax avoidance scheme reference number) their questions are very detailed, information and evidence they require are very substantial, their questions are very numerous, and they get to the heart of the issue and see past nonsense like "I worked as a permie for a month", "I bought a new laptop", "I used a different recruitment agency because I didn't want to fall foul of the TIS rules", etc.

I can't believe this is even a discussion point or up for debate.

[eazy]

Risk

I have read the above posts with interest, especially comments by @JB3000!

It has highlighted to me that some of the advice accountants are giving their clients is at best dubious. I know couple of my contractor colleagues who travel (live around 200 miles away from home) who on advice of their accountants close their companies every two years and set-up and start a new ltd company while at the same client, doing the same job to take advantage of the capital distribution and re-start the 24 month rule. One of these individuals is on their 4th company!

[Maslins]

I have read the above posts with interest, especially comments by @JB3000!

It has highlighted to me that some of the advice accountants are giving their clients is at best dubious. I know couple of my contractor colleagues who travel (live around 200 miles away from home) who on advice of their accountants close their companies every two years and set-up and start a new ltd company while at the same client, doing the same job to take advantage of the capital distribution and re-start the 24 month rule. One of these individuals is on their 4th company!

I think most (probably all) of the accountants in this thread would frown upon that, myself included. That's not the situation described in the OP though.

@JB3000 what the OP not being Stelios/Branson has to do with anything I don't know. Yes, they are contracting and there is little in the way of a real long term business value behind them, but the laws don't preclude that, indeed they're specifically there to enable people to get retained cash out of a closing company tax efficiently.

I've found another HMRC example of a transaction in securities (from this page):
"A holds all the issued 100 £1 shares in company X (reserves £80,000) and the 100 £1 shares of company Y (reserves £80,000). A exchanges the 100 £1 shares in X for 80,000 £1 redeemable preference shares and 10,000 £1 Ord shares issued by Y. Circumstance E is present and the tax advantage counteracted is the income tax payable if A had received a dividend of £80,000 from company Y. If any of the 10,000 £1 ordinary shares in company Y are subsequently repaid, the tax advantage obtained by not paying income tax on the amount repaid may also be cancelled in the year of repayment."

This one's even further from the OP's situation than the last.

Key thing from what I can see is that both HMRC examples there is nothing commercial to the arrangement at all. It's also all happening at the same time, with not even a brief period where trade is discontinued. They are both clearly playing around with the share structure in an attempt to create a CGT situation.

They're a million miles away from a contractor stopping contracting, closing the company, then at some future point re-starting contracting. I think you're scaring people unnecessarily. Sure, you may well argue I'm biased, but there's a few accountants on here who (AFAIK) don't have any links to MVL firms who seem to think it'd be outside the rules.

Liquidation hasn't really changed the tax option here, contractors were able to get cash out of a closing company with CGT treatment beforehand, with an application under ESC C16. I don't have any approval letters to hand, but I believe they would typically have a clause about the contractor confirming they didn't intend to return to the same business short term. Would be interested to know whether that had any indication of timescale to it. Inevitably as the break between closing a restarting changes, people's perceptions on whether it might be caught changes too.

[northernladuk]

I have read the above posts with interest, especially comments by @JB3000!

It has highlighted to me that some of the advice accountants are giving their clients is at best dubious. I know couple of my contractor colleagues who travel (live around 200 miles away from home) who on advice of their accountants close their companies every two years and set-up and start a new ltd company while at the same client, doing the same job to take advantage of the capital distribution and re-start the 24 month rule. One of these individuals is on their 4th company!

I also know a number of people that do this as regular as clockwork and see it as their right to do it despite pointing out the cons to them. To give them credit (if you can call it that in cases like this) none of them that I can remember fudge the 24 month rule. It also happens to be the same individuals I go head to head with when discussing expenses etc. God knows what their accountants tell them.

[Craig at Nixon Williams]

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.

For the OP’s situation, it could be a good idea to obtain clearance from HMRC. It does sound as if he has wound up the previous company with the genuine intention of ceasing trade. However, by applying for clearance, I do see that as an admission to HMRC that you have doubts over the transactions and could potentially make yourself a target for an enquiry.

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).

How can there be any question of the timing over when you apply for clearance? If you are even considering applying for clearance at the time of liquidating the company then there must be some expectation to return to the same trade at that point. In that case I would question whether the liquidation is genuine or whether it is an artificially engineered situation for the purpose of tax avoidance.

It has highlighted to me that some of the advice accountants are giving their clients is at best dubious. I know couple of my contractor colleagues who travel (live around 200 miles away from home) who on advice of their accountants close their companies every two years and set-up and start a new ltd company while at the same client, doing the same job to take advantage of the capital distribution and re-start the 24 month rule. One of these individuals is on their 4th company!

I am keen to distance myself (Nixon Williams) from some of the advice that was given by some of the other accountants in this thread who completely dismissed TIS as being something that didn’t even need to be considered. As I have maintained throughout, TIS does need to be considered by the OP when deciding how to proceed and his decision will depend on how he views the legislation – there is certainly a wide spectrum of opinions in here to think about.

Whether you like the word ‘risk’ or not – it is risk that will determine his decision. I was not referring to risk of being caught doing something that he knows is wrong, but the risk of a tribunal siding with HMRC if somebody did decide to go head-to-head with them on this. As no precedent has been set to date, there is no way of predicting how HMRC would see it if it did go to tribunal – that is the risk that I was referring to.

I should add that the advice given to your friends is particularly bad, as not only does the liquidation sound like an artificial arrangement, but the 24 months rule would not be reset due to a change in company. It is based on location..

[Maslins]

How can there be any question of the timing over when you apply for clearance? If you are even considering applying for clearance at the time of liquidating the company then there must be some expectation to return to the same trade at that point. In that case I would question whether the liquidation is genuine or whether it is an artificially engineered situation for the purpose of tax avoidance.

That was exactly my point, perhaps not clearly made.

FWIW I agree with most of the rest of your post, though don't feel the need to distance from other accountant's views, as whilst we may have worded things differently, I also feel risk is negligible in this case.

Craig (@NW) - you recall back to ESC C16 days, do you have any copies of letters from HMRC re this? I believe they typically had some comment re returning to trade, but I have no idea how it was worded, whether a timescale was included etc. Can you find one?

[Craig at Nixon Williams]

FWIW I agree with most of the rest of your post, though don't feel the need to distance from other accountant's views, as whilst we may have worded things differently, I also feel risk is negligible in this case.

Every accountant in the thread is being referred to collectively as having a cavalier attitude etc. However if you compare my stance to that of Craig @ inTouch (for example) – there is a significant difference in our approach to the issue.

They're a million miles away from a contractor stopping contracting, closing the company, then at some future point re-starting contracting. I think you're scaring people unnecessarily. Sure, you may well argue I'm biased, but there's a few accountants on here who (AFAIK) don't have any links to MVL firms who seem to think it'd be outside the rules.

Here you have stated that the OP would be ‘outside the rules’ – that is simply not the case because a tax advantage has been gained by the OP (irrespective of his intentions at the time) as a result of closing and re-opening. His situation could therefore come under scrutiny by HMRC – he does have a defence (not expecting to continue at the point of liquidation), but if a judge saw it the same way as JB3000 then he could be in trouble.

Craig - you recall back to ESC C16 days, do you have any copies of letters from HMRC re this? I believe they typically had some comment re returning to trade, but I have no idea how it was worded, whether a timescale was included etc. Can you find one?

From what I remember, the clearance letter from HMRC would simply state that ESC C16 was approved and wouldn't say anything about timescales. When applying for it, the director did have to make some declarations to HMRC about winding up the company and one of them included a statement about not intending to trade or carry on in the same business again in the future – but again no timescales.

[eazy]

ESC C16

C16. Dissolution of companies under Sections 652 and 652A Companies Act 1985: distributions to shareholders

A distribution of assets to its shareholders by a company which is then dissolved under Section 652 or Section 652A Companies Act 1985 (or any comparable provisions) is strictly an income distribution within Section 209, ICTA 1988. In most circumstances, and providing that certain assurances are given to the Inspector before the event, the Revenue is prepared for tax purposes to regard the distribution as having been made under a formal winding up so that the proviso to Section 209(1) applies. The value of the distribution is then treated as capital receipts of the shareholders for the purpose of calculating any chargeable gains arising to them on the disposal of their shares in the company.

The assurances include:

- The company

- does not intend to trade or carry on business in future; and
- intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
- intends to seek or accept striking off and dissolution.

- The company and its shareholders agree that

- they will supply such information as is necessary to determine, and will pay, any Corporation Tax liability on income or capital gains; and
- the shareholders will pay any Capital Gains Tax liability (or Corporation Tax in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made during a winding-up.

Changes in 2011
http://www.hmrc.gov.uk/tiin/tiin-esc-c16.pdf

[ASB]

Personally I think the risk is minimal. But ianaa.

one thing I havent seen mentioned is that the assets of oldco are used.

aiui the offer comes via somebody that the op worked with along the way. This was on oldco business. Is there possibly an argument that the new contract only arose as a result of the goodwill accrued to oldco. Thus it could be construed as a continuation of trade.

I appreciate this might be clutching at straws a bit, but is it a possibility.

[Maslins]

aiui the offer comes via somebody that the op worked with along the way. This was on oldco business. Is there possibly an argument that the new contract only arose as a result of the goodwill accrued to oldco. Thus it could be construed as a continuation of trade.

Interesting angle...but then I'm sure every new venture JB3000's friends Stelios/Mr Branson establish have links with multiple people they've worked with in previous businesses. Does that make them all the same business? I don't think so. Reality is I guess that everyone has a bit of personal goodwill, being their reputation for previous work done.

Re the ESC C16 bits, that's interesting but disappointing as it doesn't help clear anything up:
"The assurances include:
- The company
- does not intend to trade or carry on business in future; and..."

If they literally mean the company itself as it states, you'd be getting it struck off, so surely that's a given?! If they meant the key individual(s) behind it, then potentially it's extremely wide ranging, as there's no suggestion of same trade (note it's not carry on the business)...so surely it must be the former. That in itself doesn't seem to in any way prevent someone under the old rules from closing down Oldco obtaining CGT and starting up Newco straight away, so unfortunately I don't think it does give us anything more to go by.