Closing Ltd Co. ---> Umbrella 12 Months ---> Opening Ltd Co.

[MrContractor85]

First post so be kind!

Did do a quick search but couldn't find anything specific to this question so be great to get some opinions....

So, I've been contracting for about 3 years now and managed to build up a reserve of about 50k. Unfortunately I'm useless at saving and I want to get a mortgage and put a decent amount towards it so was considering closing the company and applying for entrepreneurs relief. I'm starting a new 6 month contract in a few weeks which I was thinking of undertaking via an umbrella company (not the best option for tax efficiencies but needs must...) Hopefully it gets renewed so the plan is to go Umbrella for about a year and then open up a new ltd company afterwards...

It gives me a good year between old and new companies so shouldn't raise any red flags with HMRC. What does everyone else think? Also, good way to get retained company earnings to use for something substantial i.e. mortgage. In essence, it's almost like contracting via ltd company, going perm for a year, then resuming contracting (albeit via a different ltd company).....

Opinions? Thanks for reading

[Craig at Nixon Williams]

It sounds like you are going to use an umbrella just for the sake of trying to ‘trick’ HMRC so that you can pay less tax. I’ve seen a few posts recently where people appear to want to manipulate their situation for tax reasons, if you are thinking of somehow engineering your arrangements purely for tax avoidance reasons then don’t do it.

From your post it looks like you intend to trade through a company again, so already you should be caught by the transactions in securities rules.

Hope this helps!
Craig

[Clare@InTouch]

I would agree with Craig in that you need to be cautious when you're doing anything with a pure tax motive and no commercial element.

However, I'm not sure how much you stand to gain from doing it anyway. If you close and have a £50k capital gain taxed at 10% that's £5,000 in tax. A higher rate dividend at 25% would be £12,500. So you gain around £7,500 - maybe slightly more if you take into account your annual exempt amount. Less if any of that dividend could be basic rate. Plus you'd have closure fees and liquidation fees, and new company set up fees later on.

But, may well lose that in extra tax & NI if you go through a brolly for a whole year (depending on your rate and expenses etc).

[ContrataxLtd]

I would agree with Craig in that you need to be cautious when you're doing anything with a pure tax motive and no commercial element.

However, I'm not sure how much you stand to gain from doing it anyway. If you close and have a £50k capital gain taxed at 10% that's £5,000 in tax. A higher rate dividend at 25% would be £12,500. So you gain around £7,500 - maybe slightly more if you take into account your annual exempt amount. Less if any of that dividend could be basic rate. Plus you'd have closure fees and liquidation fees, and new company set up fees later on.

But, may well lose that in extra tax & NI if you go through a brolly for a whole year (depending on your rate and expenses etc).

I'd agree with Clare here.

It may be possible to do as you have planned and avoid the transactions in securities rules but as you have the intention to use a Limited Company again you may be caught (open to debate). All seems a little too contrived for my liking though and could be caught by anti avoidance legislation.

Given the savings achieved compared to the lower tax efficiency of an umbrella for the year I'd be inclined to stick with the Limited company.

Martin
Contratax Ltd

[Grasser73]

I'm sure SJD used to recommend doing this sort of thing when I used them.
Do they still or has their advice changed?

[northernladuk]

I'm sure SJD used to recommend doing this sort of thing when I used them.
Do they still or has their advice changed?

Funny you should say that. I spoke to my accountant at SJD today about my company as I intend on taking a couple of months off but will definitely be contracting again. He told me to keep the company open to avoid issues. I mentioned this situation out of interest and he just dismissed it quoting both comments mentioned already about not being that tax advantageous due to umbrella set up and it will prove nothing. It's so transparent he said you might as well shut one down and re-open another immediately. He did then say he would strongly advise I didn't but the risk is just the same as what the OP is doing.

Dunno if that is the line of every accountant in the group but mine (thankfully) was having nothing to do with this.

[TheCyclingProgrammer]

It's easy to sit here and say OP would be caught by TIS rules when he's openly stating his plans. It's not so easy for HMRC to prove what his intentions were without evidence.

For all HMRC might know, he decided to shut up shop, but was unable to find a permie job so decided to take on a new contract. Because he was hoping it would be a one off to tide him over, he went through an umbrella. Still no luck finding a full time job, so decides to give contracting another go so he starts a new company.

Very hard to argue that assets for his previous company were transferred over to the new company in the way that the TIS legislation covers, or very hard to prove at least.

As others have said, it's all speculation as I'm not sure there is much case law or evidence of HMRC applying TIS in hese circumstances so you should expect caution from some accountants.

Clare may have made the most salient point though, that the savings made in tax, after deducting MVL costs, may be reduced to only a few grand by the extra tax and NI incurred through using the umbrella, even more so if you have some basic tax allowance left.

You need to sit down and work out the overall saving properly to see if it's worth the faff and risk.

[northernladuk]

I am glad you are not an accountant. If my accountant sprouted any of this I would be off like a shot.

[TheCyclingProgrammer]

I am glad you are not an accountant. If my accountant sprouted any of this I would be off like a shot.

?

Just giving an alternative viewpoint on a scenario that has no definitive answer. I'd expect a good accountant to give me all the options as well as their opinion, and outline the pros/cons and potential risks. I wouldn't want to miss out on a potential tax saving just because my accountant is "uncomfortable" or not fully versed in he rules.

There is a very good article on the rules here:
http://www.taxation.co.uk/taxation/A...feeling-secure

I think the chances of OP being caught are low, but I'd also tell him to calculate what his overall tax advantage is so he has an idea of what he might owe if HMRC pursue counteraction.

I also don't see what harm there would be in actually ringing HMRC and asking for their opinion on whether closing a company to return to full time employment, then later starting a company would be caught. You could even apply for clearance if you like! At worst they say no or refuse clearance and you carry on as normal.

It's important to note that the main purpose of the transactions in securities has to be to gain a tax advantage for HMRC to pursue counteraction. The burden of proof for this is on HMRC. If there is a genuine commercial reason then you shouldn't be caught.

[Kanye]

Just take a slightly bigger mortgage and pay it off with a future dividend. An extra £20k on the mortgage at 4% will only cost £800 whereas that £20k could cost you £8k at higher rate tax.

Directors loans can also legally be used to spread dividends over multiple years.

I have used both of the above to buy and pay off 2 properties now in very tax efficient manner. All completely above board and no paperwork or umbrella companies at all.