I have never seen this discussed, other than in dismissive terms of 'it's not a very good idea, don't bother'.
Not sure why.
Some of us are unwilling to pay Higher Rate tax, and hence our company's have large pools of cash, waiting for the day that we jack it all in, and can extract the money in a tax-efficient manner.
I have heard it said that you should avoid investing, lest your company be classed as an Investment Company. Investment Companies are not entitled to Small Companies Corporation Tax relief. Yet the HMRC manuals say clearly
An 'investment company' within old ICTA88/S130 (up to 31 March 2004) is any company:
whose business consists wholly or mainly in the making of investments,
and
the principal part of whose income is derived from those investments
see also http://www.hmrc.gov.uk/manuals/svmanual/svm27570.htm and others
So if you are contracting, then it is in no way possible that your business would consist mainly of making investments. And if you stop contracting for a few weeks, then your business is still principally contracting, despite the brief lapse. But if you jack it all in for good, then you liquidate your investments and wind up the company.
There isn't really any way that you could ever become an 'investment company', and thus pay higher CT.
The only other reason I have seen is that you could lose the entitlement to business asset taper relief. This is of course no longer relevant, but we do now have "capital gains tax entrepreneurs' relief"
http://www.hm-treasury.gov.uk/newsro...ent_240108.cfm
"It will also be available to individuals disposing of shares in a trading company, provided that the individual is an officer or employee of the company and takes a minimum 5 per cent stake in the business."
This is substantially the same as BATR: , 'a trading company' was defined as
"a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities, see definition of "trading activities" below and CG17952c.
On investment:
'Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company's trade. An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future.
The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company may intend distributing the monies received to its members. Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company's trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company's shareholders.
However, the long term retention of significant cash generated from trading activities may amount to an investment activity. Factors to consider include the present and future cash flow requirements of the business , the nature of the underlying investments used as a lodgement for the funds, the extent to which these investments are managed and whether the funds have been ear-marked for a particular use in the trading activity. '
So in this context, retaining cash for tax avoidance and investing in equities and so on, is non-trading.
This is not necessarily a problem, the requirement is that the activities are not substantial. This is laid out at
http://www.hmrc.gov.uk/manuals/cg1manual/CG17953p.htm
Most companies and groups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities "... do not include to a substantial extent activities other than trading activities". The phrase "substantial extent" is used in various parts of the TCGA92 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. Substantial in this context means more than 20%.
How should a company's non-trading activities be measured to assess whether they are substantial? Some or all of the following are among the measures that might be taken into account in reviewing a particular company's status.
Income from non-trading activities.
For example, a company may have a trade but also let an investment property. If the company's receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.
The asset base of the company.
If the value of a company's non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see below regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company's trading and other activities. Which measure is appropriate will depend on the facts in each case.
Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities.
For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.
The company's history.
For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when, for example, non-trade receipts amounted to a substantial proportion of total receipts.
It may be that some indicators point in one direction and others the opposite way. You should weigh up the impact of each of the measures in the context of an individual case. If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the Commissioners.
Investing company profits in the stock market is highly unlikely to occupy signficant time. Earning more than 20% of trading profits through non-trading activities could potentially be more of a problem. But if your company is making £100k/year trading profit, then £20k profit implies fairly substantial investments, so it's not too bad.
The biggest issue would appear to be non-trading assets being substantial relative to trading assets. But appears to be the case whether your assets are invested or simply on deposit. So this is not a warning against investing, as much as it is a danger sign about keeping cash in the company and expecting to get BATR.
Does anyone have any experience of this latter point? I know SJD have/had a pee-taking scheme where they encourage you to retain all cash above £30k in the company account and use BATR after 3 years. I don't see that the retained cash has any trading purpose (see the section in bold above), when your annual investment budget amounts to a few books and a PC. So how can these 10%-taxed distributions be a business asset?
Has anyone taken advantage of BATR?
Not sure why.
Some of us are unwilling to pay Higher Rate tax, and hence our company's have large pools of cash, waiting for the day that we jack it all in, and can extract the money in a tax-efficient manner.
I have heard it said that you should avoid investing, lest your company be classed as an Investment Company. Investment Companies are not entitled to Small Companies Corporation Tax relief. Yet the HMRC manuals say clearly
An 'investment company' within old ICTA88/S130 (up to 31 March 2004) is any company:
whose business consists wholly or mainly in the making of investments,
and
the principal part of whose income is derived from those investments
see also http://www.hmrc.gov.uk/manuals/svmanual/svm27570.htm and others
So if you are contracting, then it is in no way possible that your business would consist mainly of making investments. And if you stop contracting for a few weeks, then your business is still principally contracting, despite the brief lapse. But if you jack it all in for good, then you liquidate your investments and wind up the company.
There isn't really any way that you could ever become an 'investment company', and thus pay higher CT.
The only other reason I have seen is that you could lose the entitlement to business asset taper relief. This is of course no longer relevant, but we do now have "capital gains tax entrepreneurs' relief"
http://www.hm-treasury.gov.uk/newsro...ent_240108.cfm
"It will also be available to individuals disposing of shares in a trading company, provided that the individual is an officer or employee of the company and takes a minimum 5 per cent stake in the business."
This is substantially the same as BATR: , 'a trading company' was defined as
"a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities, see definition of "trading activities" below and CG17952c.
On investment:
'Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company's trade. An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future.
The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company may intend distributing the monies received to its members. Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company's trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company's shareholders.
However, the long term retention of significant cash generated from trading activities may amount to an investment activity. Factors to consider include the present and future cash flow requirements of the business , the nature of the underlying investments used as a lodgement for the funds, the extent to which these investments are managed and whether the funds have been ear-marked for a particular use in the trading activity. '
So in this context, retaining cash for tax avoidance and investing in equities and so on, is non-trading.
This is not necessarily a problem, the requirement is that the activities are not substantial. This is laid out at
http://www.hmrc.gov.uk/manuals/cg1manual/CG17953p.htm
Most companies and groups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities "... do not include to a substantial extent activities other than trading activities". The phrase "substantial extent" is used in various parts of the TCGA92 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. Substantial in this context means more than 20%.
How should a company's non-trading activities be measured to assess whether they are substantial? Some or all of the following are among the measures that might be taken into account in reviewing a particular company's status.
Income from non-trading activities.
For example, a company may have a trade but also let an investment property. If the company's receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.
The asset base of the company.
If the value of a company's non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see below regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company's trading and other activities. Which measure is appropriate will depend on the facts in each case.
Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities.
For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.
The company's history.
For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when, for example, non-trade receipts amounted to a substantial proportion of total receipts.
It may be that some indicators point in one direction and others the opposite way. You should weigh up the impact of each of the measures in the context of an individual case. If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the Commissioners.
Investing company profits in the stock market is highly unlikely to occupy signficant time. Earning more than 20% of trading profits through non-trading activities could potentially be more of a problem. But if your company is making £100k/year trading profit, then £20k profit implies fairly substantial investments, so it's not too bad.
The biggest issue would appear to be non-trading assets being substantial relative to trading assets. But appears to be the case whether your assets are invested or simply on deposit. So this is not a warning against investing, as much as it is a danger sign about keeping cash in the company and expecting to get BATR.
Does anyone have any experience of this latter point? I know SJD have/had a pee-taking scheme where they encourage you to retain all cash above £30k in the company account and use BATR after 3 years. I don't see that the retained cash has any trading purpose (see the section in bold above), when your annual investment budget amounts to a few books and a PC. So how can these 10%-taxed distributions be a business asset?
Has anyone taken advantage of BATR?
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