Entrepreneur's relief and dividends

[gadgetman]

I am planning to close my company some time in the next year (for legitimate reasons). I am wondering if I could use Entrepreneur's relief and what effect it would have on my total tax bill.

I currently draw a salary and most of the company profit is paid as dividends so there are little or no additional funds retained at the end of the company year.

Using round figures and ignoring PAYE and expenses, say I have a profit for the year of £100k. I will have allocated £21k for CT and paid out the remainder in dividends.

Would applying for Entrepreneur's relief affect my CT bill or would it still be payable as normal because effectively at that point there is no additional profit left in the company?

I'd ask the accountant but he is currently AWOL.

[hgllgh]

I believe that corp tax does not apply as you are disposing of all of your business. So if you qualify, you would pay 10% of the proceeds in your business account.

Look at the example on hmrc website...

http://www.hmrc.gov.uk/cgt/disposal.htm

there is no mention of corp tax being paid first.

I am thinking of doing the same as I will be travelling later in the year, but I am concerned that if I come back and start up again hmrc will come after me...

[gadgetman]

Yes but there are no examples where dividends have been issued.

I can see it working two possible ways (using my example)

1. I pay Entrepreneurs relief on the total £100k and the remainder is offset against the dividends already paid out.

2. I have to pay the 21% because the money has already left the company and there is effectively no profit.

Anyone know for sure?

[hgllgh]

i guess that whatever has been paid out as divs will be subject to the normal div/corp tax rules and whatever is left in your business account at the time of disposal of your company is the capital gain that you pay the 10% on.

[Moscow Mule]

Since it's so new, I'm not sure anybody knows exactly, except Hector.

There is an email address on one of the Entrepreneur's relief links on their website.

[VectraMan]

i guess that whatever has been paid out as divs will be subject to the normal div/corp tax rules and whatever is left in your business account at the time of disposal of your company is the capital gain that you pay the 10% on.

That's the way I read it.

There's never "profit left in the company". There's profit, and you have to pay CT on it. It doesn't affect CT if you leave the cash in the company or take it out, and the tax you personally pay when you take money out of the company (which is what the Entrepreneur's relief is) is nothing to do with CT. Which is probably why the HMRC don't include it in their examples.

[Hex]

You pay CT as you go along - what is left after this are company profits. If you have any income that you haven't accounted for yet then that will be dealt with during the final set of accounts and you will have to pay the CT due. What is left after all of this can then be distributed to shareholders as capital if you get the ESC C16 clearance from hector.

Any capital distribution is AFTER CT has been paid. Hector will not be happy if you make a capital distribution of anything other than net profits.

The shareholders then have to account for the capital gain individually. If it qualifies for the 10% Entreprenauer's relief then they pay 10% on the amount distributed.

So, simplistic calculation presuming 1 100% shareholder, 100K in the company bank account (AFTER CT has been paid) would be as follows:

Capital Gain = 100,000
Personal Capital Gains Allowance = 9,200
Capital gain subject to tax = 100,000 - 9,200 = 90,800
Tax payable = 10% * 90,800 = 9,080
Net Gain = 100,000 - 9,080 = 90,920

[gadgetman]

Understood some of that except:

You pay CT as you go along - what is left after this are company profits.

I thought it was the other way around i.e. what's left in the company (after expenses, salary etc) is profit and you pay CT on that. You don't pay it until (9 months) after year end.

Are you saying it becomes liable as you go along (if you issue dividends) or have I misunderstood?

[Hex]

I wasn't being particularly clear.

Your accountant prepares your accounts annually (usually) and you pay your Corporation tax based on what has been stated in your annual accounts. What is left after paying expenses etc and then CT is net profit which your company can retain and use to pay out as dividends etc.

When you do your capital distribution when winding up the company this comes out of net profits.

So profits the company has retained are available to pay out as dividends or as a capital distribution if the company is winding up and has got ESC C16 authorisation. From the company's perspective all of these are on what is left after you pay your CT.

There is then a difference in tax treatment for your personally depending on whether you've paid the profits out as dividends or capital. If it is capital then you (personally) can apply the Entrepreneur's relief (providing you qualify) and then you only have to pay 10% tax and you can use your capital gains tax allowance to offset some of it. If it is dividends then there is no further tax to pay personally unless you have crossed the higher rate tax threshold in which case you have to pay 25% tax on the net dividend received.

So generally, it is better to pay it out as dividends until you cross the higher rate threshold. After that, you may be better winding the company up 'cos you only have to pay 10% on the amount you extract, but you can't really go winding up companies every 6 months or so when you need some more money.

[THEPUMA]

So, simplistic calculation presuming 1 100% shareholder, 100K in the company bank account (AFTER CT has been paid) would be as follows:

Capital Gain = 100,000
Personal Capital Gains Allowance = 9,200
Capital gain subject to tax = 100,000 - 9,200 = 90,800
Tax payable = 10% * 90,800 = 9,080
Net Gain = 100,000 - 9,080 = 90,920

Not quite. The correct calculation is as follows:-

Capital gain = £100,000
Entrepreneurs' relief reduction (4/9) - £(44,444)
Net Chargeable gain - £55,556
Annual exemption - £(9,600)
Taxable gain - £45,956
Tax @ 18% = £8,272