Refusal of Entrepreneur's Relief

[LC1965]

Hi, we are thinking about closing our Limited Company via MVL and applying for entrepreneur's relief on the final capital distribution.

The company has a substantial amount of cash and I wondered if anyone has been refused entrepreneur's relief on the basis of the company being deemed 'non trading' because of cash reserves?

[Clare@InTouch]

You don't need to apply for ER as such, it's just applied to the capital gain on your tax return.

I've never seen one questioned before, and I think the largest gain I've seen was around £250k. That was in the ESC C16 days though, so no formal liquidation.

It might be worth asking the liquidators to see if they have any experience too.

[LC1965]

You don't need to apply for ER as such, it's just applied to the capital gain on your tax return.

I've never seen one questioned before, and I think the largest gain I've seen was around £250k. That was in the ESC C16 days though, so no formal liquidation.

It might be worth asking the liquidators to see if they have any experience too.

Thanks, that's a good idea.

It's hard to find out if the accountant's nervousness about 'trading company' status is justified and the tax return is completed so long after the event that it would be good to hear about other contractors' experiences.

[Maslins]

I'm afraid I don't think this is an area where you'll get any cast iron facts.

As far as I'm aware no case has yet been challenged on the grounds of a large cash balance making the company "investment" rather than "trading". However, that doesn't mean it won't ever be challenged. I'd suggest only once a case has been challenged and goes through the court will we know a bit more, as there'll then be case law to help guide.

In the meantime I'd suggest you can take some comfort from the fact cases haven't been challenged on this point (more in the ESC C16 days).

As part of MVL Online, the majority of our cases are £50k-250k, though we've had a couple recently above the half million mark. To date I'm not aware of any of these being challenged, however that in itself doesn't mean much as:
1) we only made our first distributions in the 2012/13 tax year, hence only an eager beaver would have filed the personal tax return with these distributions declared on it so far...and if HMRC were to challenge it'd likely be several months down the line.
2) we don't get involved with the personal tax returns, so even if it did get challenged, it'd be nothing to do with us.

My personal view is HMRC would have a hard time arguing a company had become investment. You'll see our views here. Whilst cash may form a large part of the assets, it's unlikely interest forms a part of the income, also unlikely time spent on investment income is anything other than trivial when compared to time spent on trading income.

[philip@wellwoodhoyle]

We had a challenge from HMRC on one of our IT consultant clients a few years back (under the old business asset taper regime).

The company had built up cash reserves of £180k which were paid out as capital upon winding up and upon which BATR relief was claimed to reduce their capital gains tax.

The tax inspector actually amended their self assessment and raised a demand for a much higher CGT liability based on full CGT rather than the reduced BATR CGT.

We contested their challenge on the grounds that the reserves had built up entirely from trading and that the company had not actively done anything with the money - i.e. it had just sat their in the normal current account earning a percent or so interest rather than being actively invested.

HMRC went away with their tail between their legs and issued revised demand downward again and then we received a closure notice.

We've always told our clients not to do anything with reserves, i.e. not to play the stock market or actively transfer funds into better interest paying accounts - i.e. accept that it's not going to pay its way if you hope to claim ER (or BATR before ER). In this case, such advice paid dividends as the CGT saved far exceeded a few percent investment return that they could have expected from relatively safe investments.

[Maslins]

Thanks for sharing Philip, good to hear an instance of a real life case. Glad it ended up in the client's favour, hopefully it provides comfort for shareholders currently considering/going through the process.