Reply to: Phoenixing.... or not?

[WordIsBond]

Thanks, Martin. That's why I'm not an accountant.

[ContrataxLtd]

Someone suggested OP's wife gifting her shares to OP.

Is there anything to be gained by OP's company buying back her shares? You could set a price for the shares equal to the reserves and buy part of them back this year and part back next year, thus benefiting from two years of CGT exemptions.

It's not ER, of course, but it would presumably be more efficient than paying dividends.

Hi WIB

This is probably a non starter as the criteria to obtain CGT treatment on a buy back of shares is arguably harder than avoiding the TIS on a potential 'phoenixing', especially for contractors. If the CGT treatment isn't met the amounts paid for the shares would be taxed as a dividend anyway but in limited circumstances it is a way of getting some reserves out of the company (as a one off) not in proportion to the shareholding.

However, if the CGT treatment could be obtained (this is a huge if) then ER would be available just as it would through a liquidation.

If anyone was actually looking at this then the amounts paid for shares would have to be at market value (clearance from HMRC almost certainly recommended) and the buy back has to be for the benefit of trade.

Martin
Contratax Ltd

[WordIsBond]

Someone suggested OP's wife gifting her shares to OP.

Is there anything to be gained by OP's company buying back her shares? You could set a price for the shares equal to the reserves and buy part of them back this year and part back next year, thus benefiting from two years of CGT exemptions.

It's not ER, of course, but it would presumably be more efficient than paying dividends.

[ContrataxLtd]

IIRC it's not enough that simply liquidating a company would trigger the transactions in securities legislation and I'm pretty sure the HMRC manual is quite explicit that a simple liquidation is NOT a transaction in securities.

The transaction arises when you subsequently set up a new company and there is some kind of transfer of assets between the new and old company. Specifically, this doesn't have to mean physical assets but could include intangible assets such as existing trade and goodwill.

IMO it's his last point that causes the problem. In order to say the TIS rules do not apply, you first have to demonstrate that you are not simply transferring your existing trade to the new company. Given that YourCo's trade (clients) and goodwill is more than likely inherently tied to you personally (it's you the clients want, not YourCo) I think it's hard to show you haven't simply transferred the trade to the new company without some kind of break.

Of course it should be obvious that the biggest issue of all is that this is all speculative as it's very untested. I agree with the sentiment that the risk is probably low and there are things you can do to make the risk lower, so the best you can do is take advice and make a judgement call. Do you base your decision on the facts and your (or your accountants) interpretation of the rules or do you simply do it based on the level of risk?

Hi TCP

In theory a liquidation could be caught by TIS but without another company being setup it would be extremely hard for HMRC to actually prove the main reason for the liquidation was to obtain a tax advantage and therefore in practice a simple liquidation shouldn't ever cause a problem. The HMRC manual states:

An ordinary liquidation (in which a company is wound up following the complete cessation of its business or the transfer of that business to a person unconnected with its original shareholders) is not within the scope of this avoidance legislation.

This is because the obtaining of a tax advantage isn't the main purpose of the transaction so the rules can't bite.

It starts getting tricky when there could be a perceived transfer of assets (tangible or not) as to the actual commercial reasons for the liquidation and thus then the TIS could bite.

Martin
Contratax Ltd

[jamesbrown]

Although ER reduces your liability, it's the difference between a dividend distribution and a capital distribution, so TIS is still a live possibility without ER, assuming the motivation was non-commercial. Otherwise, it's difficult to add much to what has already been said - it's untested and, in all likelihood, it probably isn't an issue, but it needs to be considered. I expect the majority of voluntary liquidations are based on legitimate commercial reasons (e.g. going permie), so there really hasn't been much cause for investigation. That could change.

[BolshieBastard]

Why did you do it then? Sheltering from an IR35 investigation?

As a precaution to prevent \ limit any IR35, VAT or compliance investigations.

[b0redom]

Why did you do it then? Sheltering from an IR35 investigation?

[BolshieBastard]

Hi All,
I'm currently running a Ltd with myself and Mrs b0redom as equal shareholders. Following b0redom jnr #3 starting school, she is going to return to work. I am considering closing down myco, extracting the profits and taking entrepreneur's relief, and starting up a new company with myself as sole director and shareholder.

Is this phoenixing? I would have thought that as the company structure was changing I should be OK? What's the panel's advice?

Ive closed down (or rather accountant has) 4 previous companies and opened new ones with a 50 / 50 shareholder split with wifey each time.

Havent had a problem with HMRC over the 17 year period. Didnt claim entrepreneur's relief for any of them though.

[TheCyclingProgrammer]

IIRC it's not enough that simply liquidating a company would trigger the transactions in securities legislation and I'm pretty sure the HMRC manual is quite explicit that a simple liquidation is NOT a transaction in securities.

The transaction arises when you subsequently set up a new company and there is some kind of transfer of assets between the new and old company. Specifically, this doesn't have to mean physical assets but could include intangible assets such as existing trade and goodwill.

IMO it's his last point that causes the problem. In order to say the TIS rules do not apply, you first have to demonstrate that you are not simply transferring your existing trade to the new company. Given that YourCo's trade (clients) and goodwill is more than likely inherently tied to you personally (it's you the clients want, not YourCo) I think it's hard to show you haven't simply transferred the trade to the new company without some kind of break.

Of course it should be obvious that the biggest issue of all is that this is all speculative as it's very untested. I agree with the sentiment that the risk is probably low and there are things you can do to make the risk lower, so the best you can do is take advice and make a judgement call. Do you base your decision on the facts and your (or your accountants) interpretation of the rules or do you simply do it based on the level of risk?

[ContrataxLtd]

The legislation is basically written so that you need to answer no to Was the purpose of the transaction to obtain an income tax advantage?

So how do you prove this is the million dollar question. There is an element of how do HMRC know what you were thinking but we all know HMRC are pushing to get as much tax as possible at the moment so this probably won't cut it so you will need some decent proof that you were closing the company down for a reason other that to obtain a tax advantage.

If you start to close oldCo down and take a permie job but then say don't pass probation and have to get a contract then this is a pretty good reason in my opinion. I'm also going to put the cat among the pigeons somewhat by saying the next bit so I'll get my hard hat ready........

I did go to a CPD course o few weeks ago (run by a specialist tax consultancy firm, not a scheme provider etc before anyone asks) that was surrounding the use of liquidations as tax planning and they advised part way through the course that they posed the following question to a HMRC inspector when they met him during the course of an investigation:

“do you see a problem with an IT contractor closing down a company once his contract has come to an end and possibly starting up a new company for a new contract shortly after?”

The inspectors answer shocked me quite a bit to be honest and was along the lines of:

“No, once the project is over he has no use for the company and such a liquidation is an efficient way to close it down”.

Personally, I don’t agree with this sentiment and it’s not something that they could get I writing so perhaps it was an inexperienced inspector or they caught him off guard but it possibly shows that HMRC aren’t as strict in this area as is lead to believe.

Obviously doing this at the end of every contract is probably pushing things very far (and would also expose T&S problems) but ultimately I think it comes down to your attitude to risk and just how much evidence you can get together to justify, if needed, that you weren't closing the company down to simply obtain a tax advantage. Every case is different so would need to be considered on its own merits.

Martin
Contratax Ltd

[Maslins]

"I was going to go permie, so I closed my company. Then a really good contract came along and I changed my mind".

There's some validity in most of your post...but closing a company takes a while. Unless you're prepared to take at least a couple of months off, it'll almost certainly be the case that you'll be incorporating Newco before you've got things in a state to close Oldco. Where that's the case, how can you argue it?

Agree if you've actually put the wheels in motion to irreversibly close Oldco before you open Newco, then it's down to your word against theirs.

[b0redom]

I think I'd be hard pressed to argue that unless I had the actual offer of a permie job and had started. It's unlikely on the balanced of probability that you'd shut down your Ltd just in case you found a permie job.

[jmo21]

I asked my accountant about this a while back (an ex-SJD bod).

His opinion was basically "How are HMRC supposed to know what's in your head when you close a company down".

To me this is sailing pretty close to the wind, and I'm guessing I'll get shouts of "get a new accountant".

But forgetting that for a second and tin hat firmly on, how would they prove it, or is it simply down to your own morality and not lying?

"I was going to go permie, so I closed my company. Then a really good contract came along and I changed my mind".

ps. not saying I'm going to do it by the way!

*awaits slagging*

[ContrataxLtd]

And there will be some rich pickings for HMRC when a raft of ER applications come because it's being removed. Real business case or convoluted situation because it's going.... It will be like taking candy from a baby for them.

If it's removed my guess would be that it's removed from the date of the Autumn statement to stop people planning their affairs to close companies down between then and the new tax year, who knows what will happen though...

Martin
Contratax Ltd

[DaveB]

And there will be some rich pickings for HMRC when a raft of ER applications come because it's being removed. Real business case or convoluted situation because it's going.... It will be like taking candy from a baby for them.

It would depend on the other changes. If T&S, SDC and permie after a month go through, you could make an argument that you are winding up the business as it's no longer viable.