Moving back to Perm - company?

[Sgpg]

Hello,
I have had a brief 1 year spell as a contractor but have gone back to permanent again and have just a few k's left in the company I created for the contracting role. I have now moved back to perm for the last 10 months and may well stay for the foreseeable future.
I am paying my accountant some £50 a month just to file 0.00 as the company is in a dormant state. I am not quite sure whether I should take the few k’s and close or leave it open?

[SueEllen]

Close it.

Now how you close it is the complicated question.

Are you going to be a contractor again within 2 years?

[northernladuk]

Close it.

Now how you close it is the complicated question.

Are you going to be a contractor again within 2 years?

I didn't think that mattered if he's not getting any tax relief on it?

I'd say close and be done with it.

[Neil@Intouch]

I assume the permanent role is a similar activity as what you were doing as a contractor, which would mean that you wouldn't be entitled to entrepreneurs relief.

As there is only a few thousand in the company account you could wait until 2016/17 and take the remaining profit as dividends and receive this income tax free up to £5k.

Making sure the final liabilities have been paid first of course, leaving the final payment to be taken as a dividend. Providing this is below the £5k then this will all be tax free.

[JB3000]

I assume the permanent role is the same trade as what you were doing as a contractor, which would mean that you wouldn't be entitled to entrepreneurs relief.

As there is only a few thousand in the company account you wouldn't pay any tax on the closure of the company because this would be within the capital gains exemption amount for the year.

Hi Neil,

A permanent role is not a trade (it is employment) and therefore the OP would be entitled to ER. You can consult the Finance Act 2016 for more info.

Also, you seem to contradict yourself by then saying the OP can claim capital treatment and use the annual exemption but then go onto say he can't claim a capital tax relief (ER). Surely if you are claiming capital treatment and annual exemption you can claim other capital reliefs, e.g. ER? And it also follows, if you believe the distribution would not qualify for ER then you should also believe it wouldn't qualify for other capital reliefs like annual exemption? Why are you not being consistent here? The distribution is either capital or income- it can't be both!?

I think you might have misunderstood HMRC's guidance re: company distributions and converting income into capital.

Why isn't your advice for the OP to keep the company open to 06/04/2017 and take a £5k dividend tax free?

[TheCyclingProgrammer]

I agree with JB3000. The new TAAR is about gaining a tax advantage generally, it's not specifically ER. Closing a company and taking a capital distribution represents a tax advantage over paying out the profit as a dividend - with or without ER - and if that's the main reason for closing the company then capital treatment can be denied.

The problem is if OP decides to return to contracting again via their own Ltd within two years. If they do this, HMRC can try and counteract the tax advantage gained unless you can show that tax avoidance wasn't the, or one of the, main reasons for closing the original company.

If there's not much profit in the company it's probably easier to just pay a final dividend and close it down.

[northernladuk]

I agree with JB3000. The new TAAR is about gaining a tax advantage generally, it's not specifically ER. Closing a company and taking a capital distribution represents a tax advantage over paying out the profit as a dividend - with or without ER - and if that's the main reason for closing the company then capital treatment can be denied.

The problem is if OP decides to return to contracting again via their own Ltd within two years. If they do this, HMRC can try and counteract the tax advantage gained unless you can show that tax avoidance wasn't the, or one of the, main reasons for closing the original company.

If there's not much profit in the company it's probably easier to just pay a final dividend and close it down.

I'll approve this. It's close enough.

[JB3000]

I assume the permanent role is a similar activity as what you were doing as a contractor, which would mean that you wouldn't be entitled to entrepreneurs relief.

As there is only a few thousand in the company account you could wait until 2016/17 and take the remaining profit as dividends and receive this income tax free up to £5k.

Making sure the final liabilities have been paid first of course, leaving the final payment to be taken as a dividend. Providing this is below the £5k then this will all be tax free.

Hi Neil,

It is good to see that you have changed some of the advice that you previously gave. Although you didn't change the bit about employment potentially being trade- any reason for this?

Is this Intouch's policy in general? I.e. your customers are advised not to take ER if they are going perm in the same field?

Potentially a lot of your clients could be losing out on a lot of money here?

Or is there something Intouch knows that the rest of us don't know?

[Neil@Intouch]

Morning JBJ3000,

For the new anti-avoidance rules to apply, the company being wound up must firstly be a close company and the individual must have held at least a 5% interest in the company (ordinary share capital and voting rights).

A further condition is that the individual (or connected person) continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution. Yes this would be the case for most contractors closing their company.

It must also be reasonable to assume, having regard to all of the circumstances that the arrangements appear to have a tax advantage as one of the main purposes.

The final point is what can be argued, but in regards to the OP's point they can just take a dividend on the 6/4/17 to take all the remaining profit and close the company down, with no additional personal tax liability.

[Maslins]

If the company's only got a few £k in it then tax on closure isn't of too much importance IMHO.

Key question to me (which your OP seems to answer) is whether/when you'll likely want to use the company to trade through again. If you've been in the permie role for 10 months already and sounds like you're happy, then assuming you're not doing significant sideline work, get the company closed. Seems daft to keep it open and keep paying admin fees when you sound fairly confident you won't have any use for it in the foreseeable future.

You could strike off now, get whatever's in there taxed on you via CGT, which assuming you've made no other capital disposals in 2016/17 will be covered by your annual exemption, hence entrepreneurs relief is irrelevant and no tax to pay anyway.

Yes, technically if you did then start a new company within 2 years of doing this, I guess you could find HMRC seeking to tax those few £k as dividends...but given the amounts I think it's highly unlikely to be even given a second glance, let alone challenged.

However as others have suggested, if you don't get any other dividends from elsewhere, you could wait until 6 April 17 and take the closing funds out as a dividend. If they're <£5k they'll be covered by your dividend allowance.