ER and TAAR - it's just more ambiguity from HMRC

[ChimpMaster]

Just thought I'd post an article I found vaguely interesting, in that it's a short summary of how ER might now apply.

https://www.accountancyage.com/2018/...S8s6H4.twitter

The thing that still isn't clear is whether taking a permie job (at same client or elsewhere) will negate the claim for ER. HMRC have yet again left the rules so open to interpretation that it would be easy for them to come back years later with a view that supports the income Vs capital argument to their favour.

Does one still need to apply for ER 'clearance' from HMRC? And if so, shouldn't this be sufficient to avoid a future attack from them?

[Maslins]

In terms of permie jobs, you're safe, HMRC basically confirmed that a year or two ago. The only exception is for employment by connected parties. I imagine this is there basically to prevent best buddies X and Y each closing their companies, each setting up a new entity, but then working via the other person's company...or some other convoluted scenario that's ridiculous but some idiots will attempt to do thinking they're really clever (ie the kinds of suggestions that appear on the CUK forum every day!)

Also, HMRC have specifically said they won't offer advance clearance around this. I imagine the logic being as it's very much based on future actions, they can't know in advance. Ie Joe Bloggs writes to them saying "I want to liquidate and have no plans to set up again, please confirm I'll be ok". They say "on that basis, yes". Then 6 months later lo and behold, Joe gets an amazing, completely unexpected contracting offer and does it via a brand new Ltd Co thinking he's safe. When you consider that, their stand seems fair enough.

Finally, pedant point, if you did fall foul of the TAAR, it isn't just your ER claim that gets challenged, it's bigger than that. The distributions wouldn't be capital gains at all, they'd be dividends (ie so ER becomes entirely irrelevant).

[northernladuk]

or some other convoluted scenario that's ridiculous but some idiots will attempt to do thinking they're really clever (ie the kinds of suggestions that appear on the CUK forum every day!).

That's a bit harsh. I thought yesterdays idea around having the ability to opt out of the Private Sector IR35 reforms by ticking a box on the agency paperwork was quite a good one.

[ChimpMaster]

In terms of permie jobs, you're safe, HMRC basically confirmed that a year or two ago. The only exception is for employment by connected parties. I imagine this is there basically to prevent best buddies X and Y each closing their companies, each setting up a new entity, but then working via the other person's company...or some other convoluted scenario that's ridiculous but some idiots will attempt to do thinking they're really clever (ie the kinds of suggestions that appear on the CUK forum every day!)

Also, HMRC have specifically said they won't offer advance clearance around this. I imagine the logic being as it's very much based on future actions, they can't know in advance. Ie Joe Bloggs writes to them saying "I want to liquidate and have no plans to set up again, please confirm I'll be ok". They say "on that basis, yes". Then 6 months later lo and behold, Joe gets an amazing, completely unexpected contracting offer and does it via a brand new Ltd Co thinking he's safe. When you consider that, their stand seems fair enough.

Finally, pedant point, if you did fall foul of the TAAR, it isn't just your ER claim that gets challenged, it's bigger than that. The distributions wouldn't be capital gains at all, they'd be dividends (ie so ER becomes entirely irrelevant).

Understood re: lack of advance clearance. However, even if on the self-assessment where the individual declares a capital gain and elects for ER, future actions are not certain or known. So perhaps this is where HMRC know that someone has 'converted income to capital' and only 2+ years later they will choose to open an enquiry - if they have reason to believe one of the 4 caveats has been broken (most likely C or D).

It just seems a lot more convoluted for HMRC themselves. They could have just made the taxpayer sign up to some kind of legal doc that enforces the Liquidation rules for CG, and put the onus on that person to report to HMRC if in the next 2 years something changed, for example they started back up in the same business again.

There was some glarb about the amount being claimed too i.e. the larger the amount, the more reason for HMRC to raise enquiries.

Finally, where you say "In terms of permie jobs, you're safe, HMRC basically confirmed that a year or two ago", I would not feel safe until it's somewhere in the HMRC lawbook. Preferably not within their time-machine section either.

[Maslins]

"Condition C is that the individual 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. Trade or activity is not defined, and is therefore to be interpreted widely as anything done by the company. Condition C goes on to set out the way in which the individual would be viewed as continuing the trade or activity It will include as a sole trader, through a partnership, through another company, and through connection to the company of an associate. Any connection to the same or a similar activity will suffice which will include, for example, working as an employee for a spouse in a similar trade. Condition C will not be met where the individual is employed by an unconnected third party." (my bold at the end).

I accept that's not from the legislation, but it's clearly written on an HMRC headed document, widely spread around the internet now...so it'd be very hard for them to change their mind on that without a good reason.

Your 2nd paragraph is basically what is in place surely?

3rd para - yes...but to my mind only in the same way that if a contractor puts a £300 sofa for their home lounge through the company books and calls it "office furniture", they're likely to get away with it (despite it being wrong). Only because the amount is modest so won't stick out like a sore thumb, why would HMRC think to check? Compare that to someone putting a £50k home refurb through their contractor company, that will stick out, and most likely will be enquired into.

[ChimpMaster]

Thanks, it's good to see those notes on Condition C. I hadn't seen them before with that last part in bold.

There appears to be a gap that HMRC could well attack: the Ltd to Umbrella move - on a technicality this satisfies exemption from C but in reality it could allow a director to liquidate and claim CG, whilst moving immediately to employment under an Umbrella to continue contracting at the same client.

Or perhaps HMRC should just be happy that they'll be getting their 50% tax/NI on the Umbrella employment.

[Maslins]

There appears to be a gap that HMRC could well attack: the Ltd to Umbrella move - on a technicality this satisfies exemption from C but in reality it could allow a director to liquidate and claim CG, whilst moving immediately to employment under an Umbrella to continue contracting at the same client.

Or perhaps HMRC should just be happy that they'll be getting their 50% tax/NI on the Umbrella employment.

Yeah, there's been a couple of debates on here about umbrella post liquidating. Legally (and from a tax perspective) it's employment, so my personal opinion is that it would be safe. Others understandably take the view that it's still contracting, so is risky.

To my mind what HMRC are trying to stop is the avoidance of income tax being suffered. Ie trade via a Ltd Co, taking minimal salary/dividends, build a big pot of cash, liquidate every few years. Rinse and repeat. If you go umbrella for 2+ years, like you suggest you're paying a lot of tax/NICs (aka what HMRC might call "the right amount of tax"). I therefore think they'd be happy enough.