Tax Relief

[pkm]

Hi,

I closed my company down last year 2013-2014 (Voluntary Liquidation) through a liquidator as I was taking up a permanent job and I was giving up contracting for good. I got a decent amount as capital gains from company liquidation for which I would be claiming entrepreneur's tax relief when I submit my tax returns for 2013-2014.

However, after over a year in my permanent job, I want to go back to contracting as I'm not enjoying the permanent job.

Does this affect my claim to entrepreneur tax relief? It has been over a year since the company ceased trading in April. Will HMRC raise questions in my case?

[taxguru]

Hi,

I closed my company down last year 2013-2014 (Voluntary Liquidation) through a liquidator as I was taking up a permanent job and I was giving up contracting for good. I got a decent amount as capital gains from company liquidation for which I would be claiming entrepreneur's tax relief when I submit my tax returns for 2013-2014.

However, after over a year in my permanent job, I want to go back to contracting as I'm not enjoying the permanent job.

Does this affect my claim to entrepreneur tax relief? It has been over a year since the company ceased trading in April. Will HMRC raise questions in my case?

Presumably you would be operating through a new company. Your ER claim was based on your eligibility at the point of the claim and it has nothing to do your future ventures. HMRC cannot infringe on your personal freedom to do or not to do anything; their job is to enforce the tax laws and collect the taxes due!

[Clare@InTouch]

Provided you had a commercial motive at the time, which you appear to have had, then I can't see there being a problem.

A claim for ER could, in theory, be challenged if you closed a company purely for tax purposes - that's the whole phoenix company issue. That's not what you did though as you closed the company to take a perm job, so the fact that you're going back to contracting such a long time afterwards isn't connected to the original closure.

[Martin at NixonWilliams]

Hi,

I closed my company down last year 2013-2014 (Voluntary Liquidation) through a liquidator as I was taking up a permanent job and I was giving up contracting for good. I got a decent amount as capital gains from company liquidation for which I would be claiming entrepreneur's tax relief when I submit my tax returns for 2013-2014.

However, after over a year in my permanent job, I want to go back to contracting as I'm not enjoying the permanent job.

Does this affect my claim to entrepreneur tax relief? It has been over a year since the company ceased trading in April. Will HMRC raise questions in my case?

If the new business is carrying out a trade that is clearly different to the one previously carried out through your old company, there should not be an issue. If the new company will be carrying out the same trade as the old company, you might want to consider the transactions in securities legislation.

Broadly speaking, the legislation exists to stop people from closing a company in order to achieve a tax advantage (usually via a capital gain and entrepreneurs relief) in extracting the cash from the business and then carrying on the same trade through a different company or other type of business.

As far as I am aware, this has not been tested in the courts for a personal service company so it is difficult to say what would be seen as the ‘same trade’. In my view, the type of work being performed and your end client etc would be key indicators of a contractor resuming the same trade.

It remains to be seen whether taking a year or so away from contracting would add weight to your argument that it is a separate trade however I would expect your circumstances to put you in a better position than somebody who closes the company and reopens it the following day, for example.

I hope this helps.

Martin

[Maslins]

My personal view = zero risk in your situation.

I completely agree with Martin that to date, I don't think this has been tested through the courts...therefore we're all just speculating.

However, see HMRC's example here. A business transfers all the trade and assets bar cash from Oldco to Newco, then liquidates Oldco. The business continued undisrupted, just from a different legal entity.

To my mind that's a million miles away from someone trading, closing the business to do something different for a year, then setting up a new company afterwards. There's a very clear break in trade, even if it is considered the same trade.

I guess if it wasn't a year, but perhaps a month (or even a week), then I could see the argument that the trade never stopped, the person just took a holiday...but a year with no business activity?

[taxguru]

I'll really like to see how the Revenue could serve a s.695 (ITA/07) notification on the basis that the two companies are in to the 'same trade'!!! Unless (s.685(2)(c) there is any direct or indirect transfer of assets of one close company to another close company and the person does not pay or bear income tax on the consideration , which clearly is not the case here, how can transaction in securities apply in this case?? There is no connection between the two businesses except that the same person is behind it, and to stop which clearly is not the intention of the legislation.

[pkm]

Thanks for your responses. Much appreciated. I understand that legislation exists to stop people from taking advantage. I haven't been in contracting business for over a year and have held a permanent job during that period of time. So I'm in a much better position as you all have said. I was a bit nervous as I did not want to be hit with a tax bill of 28% cap gains as opposed to 10% with entrepreneur tax relief.

[Martin at NixonWilliams]

Thanks for your responses. Much appreciated. I understand that legislation exists to stop people from taking advantage. I haven't been in contracting business for over a year and have held a permanent job during that period of time. So I'm in a much better position as you all have said. I was a bit nervous as I did not want to be hit with a tax bill of 28% cap gains as opposed to 10% with entrepreneur tax relief.

No problem. Note that if the TIS rules were to apply the income would be treated as a dividend rather than being taxable at 28%.

[Martin at NixonWilliams]

I'll really like to see how the Revenue could serve a s.695 (ITA/07) notification on the basis that the two companies are in to the 'same trade'!!! Unless (s.685(2)(c) there is any direct or indirect transfer of assets of one close company to another close company and the person does not pay or bear income tax on the consideration , which clearly is not the case here, how can transaction in securities apply in this case?? There is no connection between the two businesses except that the same person is behind it, and to stop which clearly is not the intention of the legislation.

I am surprised at your relaxed view on this. Following your logic, a company could close and reopen every year carrying on the same trade but under a different name and the contractor would never need to pay higher rate tax until they have exhausted their £10m ER limit in full - If picked up by HMRC, I doubt this would escape a challenge.

The main purpose of the legislation is to counteract transactions involving securities that exist in order to achieve a tax advantage. You have quoted b) and c) of s.685 but not section a), which considers the distribution of assets of a close company - this is clearly the case here.

As has been said, until tested in this way we do not know how it would be viewed. In the case above, it seems likely that the trade had genuinely ceased and that the TIS rules would not apply, but the rules are worth considering.

[Maslins]

No problem. Note that if the TIS rules were to apply the income would be treated as a dividend rather than being taxable at 28%.

Yup. Two potentially grey areas with different consequences:

1) Transactions in securities (suggesting business didn't cease trading when company closed) - consequence = no longer considered a CGT disposal, instead dividends.

2) Trading vs investment (where some concern that cash balance is very high might suggest company has become an investment company due to assets held/interest received vs trading assets/income) - consequence = still CGT, but wouldn't qualify for entrepreneurs relief.

To date we're not aware of any MVLO cases being challenged on either front...however we just deal with the company closure side of things. The clients then separately have to disclose the distributions on their personal tax return(s), which could be many months down the line, and potentially another year until possible HMRC challenge.

Not trying to scare anyone...but sadly as with IR35, tax law is moving more and more towards interpretation, meaning you can rarely have 100% certainty on something.