Holding large amounts of cash company reserve account

[tangent]

A few years ago, I was warned by someone that HMRC might take a dim view about holding large amounts of cash in a company. I am talking hundreds of thousands here. I think the issue is that HMRC might decide that you are running a close investment company and levy full corporation tax on your profits instead of the small company rate.

Does anyone have a view on this? Anyone been caught out?

[northernladuk]

I think some of the blue chips hold a slightly larger amounts of cash in their companies and seem to get away with it! You mean holding the profits don't you? Or do you mean transfered large sums of cash in that haven't been earned?

[MarillionFan]

Surely as long as you pay your 21% corp tax each year on the profits you can keep it there as long as you like.

[tangent]

I think some of the blue chips hold a slightly larger amounts of cash in their companies and seem to get away with it! You mean holding the profits don't you? Or do you mean transfered large sums of cash in that haven't been earned?

Yes, blue chips can hold large amounts in reserve and they pay tax on profits at the full CT rate, not the lower rate that we do. I definitely mean profits - cannot see any point in paying my own money in!

[northernladuk]

Yes, blue chips can hold large amounts in reserve and they pay tax on profits at the full CT rate, not the lower rate that we do. I definitely mean profits - cannot see any point in paying my own money in!

We have had a couple of questions recently, particularly from lady ex's who's hubbies are putting all their spare cash in to their business in a way to disguise it or hide it from something. Just making sure it wasn't on those lines or something.

[tangent]

Surely as long as you pay your 21% corp tax each year on the profits you can keep it there as long as you like.

Yes, I know you can, but this was not the point I was making.

Perhaps I should explain a bit more on this as it is obscure. Contractors' companies are called "Close Companies" by HMRC as they satisfy a certain set of rules regarding the number and type of employees/directors. Absolutely nothing wrong with the classification. Contractor's companies with less than 300k per year profits pay CT at the loer rate, currently 21%. Big companies pay tax at the full rate, which is 28%. If however, you set up a company that does not trade, but holds investments (shares, bonds, unti trusts, whatever), then this will be a "Close Investment Company" and tax will be applied at 28% regardless of the profit. The problem that I think I was warned about is that if you hold large amounts in reserves, generated from previous profits, then HMRC may class your company as a Close Investment Company and you will then end up paying the main CT rate on all of your profits. I think this is more likely to happen if you start to put company money into bonds, shares, etc, instead of just on deposit, but I still think it can happen by just holding cash.

My question is whether there are any contractors out there who have heard of this or been caught by it?

[Alan @ BroomeAffinity]

Close companies: close investment holding companies: definition

Can't see it ever being an issue unless you are investing the profits generated in other stocks etc.

[tangent]

Close companies: close investment holding companies: definition

Can't see it ever being an issue unless you are investing the profits generated in other stocks etc.

Thanks for the link. I have just reviewed this again. Unfortuneately I can see this being an issue in 2 cases. The worrying bit is the wholly or mainly stuff here:

Close companies: close investment holding companies: wholly or mainly

I see this being an issue if a contractor takes a long sabbatical or a prolonged period without a contract. In this case the company income will be predominently from investments - interest on deposits or other investments.

The other case is when a contractor chooses to retire and just runs the company down over a few years, drawing a small salary and below higher tax rate dividends. This is what I am aiming to do, hence the point of the posting.

Having said all that, I have just realised that it probably does not matter whether my company is classified as a CIC or not as it would have negligible profits to be taxed on anyway. In fact it would probably operate at a loss.

I would still be interested to know whether there is an issue here or am I just being paranoid?

[MarillionFan]

Why are you keeping your money in your LTD?

[tangent]

Why are you keeping your money in your LTD?

To avoid paying higher rate tax!