Reply to: MVL - Autumn Statement

[Maslins]

I don;t think it would apply in that case as you would not be liquidating the company you would be selling it (i.e. selling your shareholding in a close company to a another individual or company). That would be an out and out capital gain as you would have paid the nominal £1 per share for 100 shares and then sell them at market value (i.e. what the buyer will pay for assets and good will).

Some deals would go that way, but it's also very common for a purchaser to not actually buy the shares of the company, but to buy the trade and assets from the company. Massive tax differences for buyer and seller, with pros and cons.

However, the result is the vendor ends up still owning a shell company with no trade/assets bar a big lump of cash (the sales proceeds...less tax), which they'd likely want to then liquidate. Assuming they were kept on as an employee for a while to ensure smooth handover, they likely would be an employee of the acquiring firm, hence could be at risk of this.

[northernladuk]

I don;t think it would apply in that case as you would not be liquidating the company you would be selling it (i.e. selling your shareholding in a close company to a another individual or company). That would be an out and out capital gain as you would have paid the nominal £1 per share for 100 shares and then sell them at market value (i.e. what the buyer will pay for assets and good will).

Very good point.

[handyandy]

Indeed. Particularly when many home grown consultancies get bought out because of their customer base base and the directors/owners work as permies for a period of time after, leave and start again. That's gonna be a problem for them surely.

I don;t think it would apply in that case as you would not be liquidating the company you would be selling it (i.e. selling your shareholding in a close company to a another individual or company). That would be an out and out capital gain as you would have paid the nominal £1 per share for 100 shares and then sell them at market value (i.e. what the buyer will pay for assets and good will).

[jamesbrown]

Sole trader is specifically mentioned...and I think it's clear (from the name if nothing else!) that a sole trader has a "trade". So if a Ltd Co owner disincorporated, it would almost certainly fall foul of the new rules. I think this will be deliberate when considered alongside the new "dividend tax", as I imagine a fair few micro businesses will consider the reduced admin of going sole trader now the tax difference is greatly reduced. Probably not contractors though due to their clients unlikely to want to touch them as sole traders.

My previous belief was that "activity" was used as well to ensure it would catch investment businesses, not just trading ones. Seems I was wrong re this...or at least not everyone shares my assumption.

I'm hoping that there'll be a few specific exceptions, or as a minimum, examples of situations that will/won't be caught, so people can carefully align themselves with one of the "safe" examples.

Yes, no question about sole traders; the clue is in the name. My guess is that "activity" won't make it through but, if it does, and there aren't other exclusions, no amount of guidance will eliminate the uncertainty, and that will have some perverse consequences, as you mention.

[Maslins]

I think a likely outcome is that anyone switching from a company to sole trader would be caught, but not someone switching from a company to employee. In other words, I can't see "activity" remaining but, if it does, no amount of assurances from HMRC are going to be worth the paper they're written on. It will need to be tested, because "activity" is potentially all-encompassing, beyond retirement (and even then, there may be questionable situations).

Sole trader is specifically mentioned...and I think it's clear (from the name if nothing else!) that a sole trader has a "trade". So if a Ltd Co owner disincorporated, it would almost certainly fall foul of the new rules. I think this will be deliberate when considered alongside the new "dividend tax", as I imagine a fair few micro businesses will consider the reduced admin of going sole trader now the tax difference is greatly reduced. Probably not contractors though due to their clients unlikely to want to touch them as sole traders.

My previous belief was that "activity" was used as well to ensure it would catch investment businesses, not just trading ones. Seems I was wrong re this...or at least not everyone shares my assumption.

I'm hoping that there'll be a few specific exceptions, or as a minimum, examples of situations that will/won't be caught, so people can carefully align themselves with one of the "safe" examples.

[jamesbrown]

the guy behind the consultation suggests that taking a PAYE job in a similar field after liquidating WOULD count as continuing the same "trade or activity".

I think a likely outcome is that anyone switching from a company to sole trader would be caught, but not someone switching from a company to employee. In other words, I can't see "activity" remaining but, if it does, no amount of assurances from HMRC are going to be worth the paper they're written on. It will need to be tested, because "activity" is potentially all-encompassing, beyond retirement (and even then, there may be questionable situations).

[ChimpMaster]

<snip>I've emailed Adrian Coates with my views...which in short are that the proposed rule changes are mostly fine, they add clarity to what HMRC will deem as continuing the same trade vs one trade stopping and a new one starting (basically two years passing)...but that I feel someone liquidating a Ltd Co to take on a permie role should be clearly excluded. Otherwise, given the tax difference that can be at stake on CGT with ER vs dividends on (say) £200k is so massive, we could end up in the daft situation where someone's better off literally sitting on their backside for two years post liquidating rather than work and earn a salary, as the latter could easily end up seeing them worse off overall.

Wrote a blog post with my thoughts for anyone who's interested. I can see that Adrian Coates has read my email, but he hasn't responded yet (was only two days ago).

Exactly my thoughts as posted at http://forums.contractoruk.com/futur...ml#post2182187

[MrMarkyMark]

Indeed. Particularly when many home grown consultancies get bought out because of their customer base base and the directors/owners work as permies for a period of time after, leave and start again. That's gonna be a problem for them surely.

Very good point

[northernladuk]

Ridiculous if that's the case, although I have thought that this could potentially be an issue, when considering the changes.

Typical of the usual lack of joined up thinking

Indeed. Particularly when many home grown consultancies get bought out because of their customer base base and the directors/owners work as permies for a period of time after, leave and start again. That's gonna be a problem for them surely.

[MrMarkyMark]

In particular, looks like the guy behind the consultation suggests that taking a PAYE job in a similar field after liquidating WOULD count as continuing the same "trade or activity". He does go on to say that in that situation he anticipates it unlikely the main reason for liquidation would be tax motivated, but I personally wouldn't feel comfortable in HMRC sticking to that.

I've emailed Adrian Coates with my views...which in short are that the proposed rule changes are mostly fine, they add clarity to what HMRC will deem as continuing the same trade vs one trade stopping and a new one starting (basically two years passing)...but that I feel someone liquidating a Ltd Co to take on a permie role should be clearly excluded. Otherwise, given the tax difference that can be at stake on CGT with ER vs dividends on (say) £200k is so massive, we could end up in the daft situation where someone's better off literally sitting on their backside for two years post liquidating rather than work and earn a salary, as the latter could easily end up seeing them worse off overall.

Ridiculous if that's the case, although I have thought that this could potentially be an issue, when considering the changes.

Typical of the usual lack of joined up thinking

[Maslins]

Bit late to this, but perhaps worth having a quick look here. In particular, looks like the guy behind the consultation suggests that taking a PAYE job in a similar field after liquidating WOULD count as continuing the same "trade or activity". He does go on to say that in that situation he anticipates it unlikely the main reason for liquidation would be tax motivated, but I personally wouldn't feel comfortable in HMRC sticking to that.

I've emailed Adrian Coates with my views...which in short are that the proposed rule changes are mostly fine, they add clarity to what HMRC will deem as continuing the same trade vs one trade stopping and a new one starting (basically two years passing)...but that I feel someone liquidating a Ltd Co to take on a permie role should be clearly excluded. Otherwise, given the tax difference that can be at stake on CGT with ER vs dividends on (say) £200k is so massive, we could end up in the daft situation where someone's better off literally sitting on their backside for two years post liquidating rather than work and earn a salary, as the latter could easily end up seeing them worse off overall.

Wrote a blog post with my thoughts for anyone who's interested. I can see that Adrian Coates has read my email, but he hasn't responded yet (was only two days ago).

[handyandy]

My pennies worth...


I have contracted several times in the past 25 years in IT roles (and my dad was an oil industry on-shore planner who contracted from the early 1970's until retirement).

I've started LTD's when contracting and closed them down if/when I got a good permie job (unlike many here I'm a bit of a tart and will go for the best deal for me and don;t care if I have to either play the political game as a permie or play the game of keeping several eyes open for the next gig as a contractor - either way it is just the normal stress of making a living). The only time I was somewhere in the middle was when I did just under 2 years on a contract via an MSC back in the mid 2000's - I did that as I was 'worried' about being IR35 caught and with hindsight regret I did;t just stick with a LTD.

The first and only time I have used this was about 6 years ago when I went permie again after 5 years of contracting with 3 different clients - i had >£100K of retained profit and used the entrepreneurs relief scheme (nice letter to HMRC) to wind up and pay 10% on everything over my CGT allowance for the year.

At no time up until around the late 2000's had I heard about Entrepreneurs relief or MVL as a route to extracting retained earnings (in fact my dad always used to say that it was not really an option to retain profits back in his day and would likely attract a revenue visit - at least that's the advice his accountants always gave him).

Now that's not to say that it was not possible to do a liquidation before the 2000's to take retained profits as a capital distribution from a one man PSC type LTD (I'm not sure I even remember the term PSC being used till recently), but I don;t think it was customary practice - perhaps that was due to the cost of a liquidation, maybe it was based on revenue action if PSC companies tried to do it, I suspect that it was changes to CGT and other taxes that came in during the Blair/Brown years that opened up an advantageous tax saving opportunity. My take is that until the 2000's the PSC contracting business was that much smaller and the revenue accepted it as a necessary evil but the majority of owner run businesses fell into more 'traditional' models (corner shop, local garage).

I think that the series of 'attacks' on PSC contacting over the past 15+ years has mainly been driven by the expansion of the sector and various governments being worried about people switching from traditional employment (often for life) into shorter term contracts which are outside the PAYE net. That obviously means those individuals are going to look at whatever options are available to reduce their tax burden.

Closing off the winding up with capital distribution route is part of the cat and mouse that seems to be part and parcel of the greater uncertainty we have to live with now. I expect there will be more moves in this area until the number of liquidations reduces and the average length of incorporation of such companies increases significantly. I would expect the government/HMRC to be generally supportive of the corner shop owner who runs his business for 20 years and then wants to sell up as a going concern or liquidate and sell capital assets and use the extracted capital distribution as a retirement nest egg. I think they will be less open to 'serial entrepreneurs' who open and close LTD's and try to get a tax break from it.

In summary - my expectation is that there is general government agreement (across all parties) that HMRC will be allowed to differentiate PSC type companies from others and tax them similarly to employed workers - the general drive of IR35, intermediaries legislation, T&E, Dividend tax changes, etc. is all aimed at doing this and there does seem to be a concerted effort to close every new loophole that is found - it's been going on for 15 years now and shows no sign of slowing.

Does this spell the end for contracting? No, but it certainly is very disruptive and it will probably take another 10-15 years for things to reach an equilibrium - my guess is that the equilibrium will be that contractors pay more tax but that we (at least the highly skilled and experienced ones) will then command higher rates as a result. However, I don;t think the days of contractors 'grossing' 2-3 times the amount of an equivalent permie and then retaining 75%+ will ever come back.

HA

[RockyBalboa]

This post is more out of curiosity than anything to see what other people make of my circumstances.

I left the UK in July 2014 and have not been back since.

At the time I left the UK I was unsure how long I would be away and, at that point, only had a working holiday visa for Australia and no job so there was a real possibility I would be back and working though my ltd again early 2015.

Fast forward and I'm currently working on a sponsored visa.

I decided post Autumn budget to liquidate my company; primarily because I'm unsure when I will be back to the UK (If ever). Primarily I want the money out but there's obviously running costs associated and I wanted to try and limit any potential IR35 liability.

I think it unlikely that the final distribution will be made before April 6th 2016.

Given these circumstances, if I return to the UK and want to contract again would I fall foul of the proposed 2 year gap between forming ltd companies if I enter back into the same trade?

I know it's the hallmark of HRMC to draft badly worded legislation, that it's still being drafted and my circumstances are very specific but surely there's going to be a ton of other folks with equally unique situations who are not taking the proverbial.

Any thoughts welcomed!

Initial distribution prior to April '16 = okay; post-April second distribution = declare as dividend? (i.e. no ER).

[JB3000]

This post is more out of curiosity than anything to see what other people make of my circumstances.

I left the UK in July 2014 and have not been back since.

At the time I left the UK I was unsure how long I would be away and, at that point, only had a working holiday visa for Australia and no job so there was a real possibility I would be back and working though my ltd again early 2015.

Fast forward and I'm currently working on a sponsored visa.

I decided post Autumn budget to liquidate my company; primarily because I'm unsure when I will be back to the UK (If ever). Primarily I want the money out but there's obviously running costs associated and I wanted to try and limit any potential IR35 liability.

I think it unlikely that the final distribution will be made before April 6th 2016.

Given these circumstances, if I return to the UK and want to contract again would I fall foul of the proposed 2 year gap between forming ltd companies if I enter back into the same trade?

I know it's the hallmark of HRMC to draft badly worded legislation, that it's still being drafted and my circumstances are very specific but surely there's going to be a ton of other folks with equally unique situations who are not taking the proverbial.

Any thoughts welcomed!

Well, if you have ticked the ER box on the tax return and start submitting tax returns again as a closed company director expect an investigation! Their systems will know you are a contractor because of the employment intermediary report your agency has to submit on you. Squeaky bum time!

Re: IR35, I believe HMRC can always transfer the company's debt onto you anyway so I don't think you can escape that easily!

So an ER investigation could very quickly become IR35 one as well!

Try not to lose too much sleep.

[Mister Clark]

This post is more out of curiosity than anything to see what other people make of my circumstances.

I left the UK in July 2014 and have not been back since.

At the time I left the UK I was unsure how long I would be away and, at that point, only had a working holiday visa for Australia and no job so there was a real possibility I would be back and working though my ltd again early 2015.

Fast forward and I'm currently working on a sponsored visa.

I decided post Autumn budget to liquidate my company; primarily because I'm unsure when I will be back to the UK (If ever). Primarily I want the money out but there's obviously running costs associated and I wanted to try and limit any potential IR35 liability.

I think it unlikely that the final distribution will be made before April 6th 2016.

Given these circumstances, if I return to the UK and want to contract again would I fall foul of the proposed 2 year gap between forming ltd companies if I enter back into the same trade?

I know it's the hallmark of HRMC to draft badly worded legislation, that it's still being drafted and my circumstances are very specific but surely there's going to be a ton of other folks with equally unique situations who are not taking the proverbial.

Any thoughts welcomed!