MVL - Autumn Statement

[ChimpMaster]

As a few people have said in this and other threads on the subject, basically going forwards if you restart in the same trade within 2 years of liquidating, you run the risk HMRC tax the distributions as dividends rather than as CGT receipts.

Except that there is the ambiguity of what is meant by the "same trade".

For example...

Closing your IT Ltd Co and getting a permie IT job in the same tech - is that the "same trade"?

Closing your IT Ltd Co and opening another Ltd Co offering services in a different tech - is that the "same trade"?

[Maslins]

Yes there's still some ambiguity, I think it's just in consultation (search for consultation document 7029 if you're interested)...but IMHO it's clearer than it was.

@RockyBalboa - I believe it's currently planned to be based on distributions. Eg if you got your first distribution today, final distribution in 6 months time, then started a new company in 26 months time, then I think the first distribution would be safe to retain CGT treatment, the second one would be at risk.

@Chimpmaster - getting a permie job IMHO isn't a trade, so I can't see that being at risk. My personal view is your second situation likely would be caught, even if it's a different tech. If it wasn't, I could imagine every contractor being able to find some pedantic difference between what Oldco did and Newco does.

[RockyBalboa]

Yes there's still some ambiguity, I think it's just in consultation (search for consultation document 7029 if you're interested)...but IMHO it's clearer than it was.

@RockyBalboa - I believe it's currently planned to be based on distributions. Eg if you got your first distribution today, final distribution in 6 months time, then started a new company in 26 months time, then I think the first distribution would be safe to retain CGT treatment, the second one would be at risk..

In such a circumstance, could one just not apply for ER on the second distribution?

[Iliketax]

Except that there is the ambiguity of what is meant by the "same trade".

For example...

Closing your IT Ltd Co and getting a permie IT job in the same tech - is that the "same trade"?

Closing your IT Ltd Co and opening another Ltd Co offering services in a different tech - is that the "same trade"?

The legislation is still in draft and may well change before it is finalised (July 2016). The current draft legislation is a lot wider than "same trade" and it is likely to stay that way.

Condition B is that, at any time within a period of two years beginning with the date on which the distribution is made—
(a) the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company,
(b) the individual, or a person connected with him or her, is a participator in a company which at that time—

(i) carries on such a trade or activity, or
(ii) is connected with a company which carries on such a trade or activity, or

(c) the individual is involved with the carrying on of such a trade or activity by a person connected with the individual

These three tests are "or" tests. And there is nothing in (a) that says being an employee is ok. The term "similar" is quite wide and "activity" has been deliberately chosen to be different to trade (e.g. to catch being an employee).

My penny's worth: If you program Coral 66 at the moment and move to selling computers then that would be different enough. But if you change from Coral 66 and start creating iphone apps for other people then that would probably be similar. If you start creating your own apps and then market them and sell them yourself, that would not be similar. The key for me is that the risks being taken are different (e.g. investing in stock or creating, marketing and selling on your own account) or the activities that you do are very different (e.g. programming now, being a lawyer next).

[Maslins]

In such a circumstance, could one just not apply for ER on the second distribution?

A couple of things:
1) quite possibly at the time you declared the distribution for personal tax purposes you wouldn't know that you were going to restart contracting soon after,
2) if you did fall foul of the rules, it's not that you wouldn't be able to claim ER, it's that it wouldn't even be a CGT distribution, it'd be a dividend.

[RockyBalboa]

A couple of things:
1) quite possibly at the time you declared the distribution for personal tax purposes you wouldn't know that you were going to restart contracting soon after,
2) if you did fall foul of the rules, it's not that you wouldn't be able to claim ER, it's that it wouldn't even be a CGT distribution, it'd be a dividend.

1) agreed.
2) but if it did transpire that a similar trade wad undertaken within that time, just declare the second distribution as a dividend?

[ChimpMaster]

A couple of things:
1) quite possibly at the time you declared the distribution for personal tax purposes you wouldn't know that you were going to restart contracting soon after,
2) if you did fall foul of the rules, it's not that you wouldn't be able to claim ER, it's that it wouldn't even be a CGT distribution, it'd be a dividend.

A course of action to take in this 'timing' situation might be to take a large director's loan just before commencing liquidation proceedings, and make a capital distribution ASAP to pay off that loan. You would need to retain a certain amount for the final distribution, but at least the initial distribution would be OK.

[Maslins]

These three tests are "or" tests. And there is nothing in (a) that says being an employee is ok. The term "similar" is quite wide and "activity" has been deliberately chosen to be different to trade (e.g. to catch being an employee).

You may be right...but I'd be surprised. I would guess that "activity" is included in addition to "trade" so that it covers investment businesses, not so that it also catches employees.

[ChimpMaster]

You may be right...but I'd be surprised. I would guess that "activity" is included in addition to "trade" so that it covers investment businesses, not so that it also catches employees.

Well that's what I am hoping because for me a logical plan of action is to stop contracting in year (because of dying tech) and get a decent permanent employed IT position somewhere. The alternative, if ER changes make this unviable, will be for me to take a 2 year sabbatical, which ironically will work out better financially!

I guess we'll have to wait and see.

[Maslins]

Well that's what I am hoping because for me a logical plan of action is to stop contracting in year (because of dying tech) and get a decent permanent employed IT position somewhere. The alternative, if ER changes make this unviable, will be for me to take a 2 year sabbatical, which ironically will work out better financially!

I guess we'll have to wait and see.

I can't see any logic to the govt insisting someone doesn't work at all for 2 years...?

I do see the logic that they don't want a contractor restricting drawings to basic rate dividends, then liquidating every couple of years, rinse and repeat.