Making a comeback from an MVL

[washed up contractor]

I've done a bit of looking and found this thread:-

https://forums.contractoruk.com/acco...quidation.html

But as it was dated 2015 I just wanted to check.

I closed my company at the end of 2016, however the MVL didn't complete until September last year.
I'm currently in permieland but unfortunately there is a real possibility of redundancy.

Based on that thread would there be any issue from HMRC if I opened up a new company should that happen?
Would it make any difference if I went though an Umbrella instead?
Or am I screwed and need another permie role?

The only reason I ask is that there seem to be more contract roles available in the area at the moment than permanent roles.

Thanks

Talk to an accountant. Many give a free 15 - 30 minute intro Q & A.

[jamesbrown]

Yep, I've read the legislation, which is why I knew it was the fourth condition As I said, the legislation includes a "main purpose" test, which is precisely the point I am making about subjectivity. This is why it's an issue of "guidance" w/r to how it might be applied to contractors, but you simultaneously cannot rely on any guidance from HMRC. If you were to rely on it, the preliminary examples cited by HMRC (which are available online if you want to search for them) would favour your interpretation in the case of the OP. I am saying that the OP would be on uncertain ground and that it would be sensible to go with an umbrella, especially towards the end of the two-year period.

[WordIsBond]

You're right, it's the fourth condition. It was condition C but the final legislation has it as condition D.

This is not a question of HMRC's "guidance", however. It's actually in the legislation. Wording:

(5)Condition D is that it is reasonable to assume, having regard to all the circumstances, that—
(a)the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or
(b)the winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax.

The purpose of using ER is to reduce income tax, no doubt.

But if he went permie and stayed permie for more than a year, ending only when he was made redundant, it would be silly to argue that the main purpose of the winding up was to avoid tax. Maybe if he took voluntary redundancy you could argue that, he took his cash and then jumped at the first chance. But if he's made redundant involuntarily, then it is an easy argument to win. It is not reasonable to assume that he wound up his company to save tax. It is reasonable to assume he wound it up because he thought he didn't need it anymore and he didn't want to go on paying accountancy fees, etc. It is reasonable to assume that he intended to continue as a permie for two years and more, and still would be if something unforeseen hadn't happened.

Yes, there's an element of risk, but unless there's a lot of tax at stake it's a risk personally I would take. They've tried to scare people into viewing the 2 years as a hard and fast rule, and they aren't likely to chip away at that by taking on a case that is likely to set a precedent undermining that fear. I think it is very unlikely they would challenge this because of the fear they would lose and that it would become a bad and publicised precedent. And I think it is very unlikely he would lose if they did challenge it (assuming we are getting the whole story).

Everyone's tolerance to risk varies, though.

[jamesbrown]

In reference to the two year period, yes, that is what matters. In either case, he'd be on the wrong side of that guideline, so it doesn't matter for that anyway.

But that's not the only guideline. Intent matters (condition C).

And if he stopped trading, began the winding up process, and became an employee 15 months ago, gets made redundant this month, and starts contracting again in April after a respectable job search for another permie role, it's going to be very hard for them to argue his intent was to gain a tax advantage.

But if he began the winding up last summer, months after becoming an employee, then the picture looks much worse for him, IMO.

Honestly, I don't think it makes much difference. If you're relying on the fourth condition, alone, in the TAAR (the main purpose test), you're on shaky ground, because this is subject to interpretation and could easily be reinterpreted in future. That's why HMRC don't provide a clearance procedure for a TAAR with a main purpose test; they would have no idea, until the point of investigation, whether tax was an important factor. Arguably, tax is always an important factor in an MvL. HMRC has a history of reinterpreting its own "guidance". If you're near the end of the two year period, it's pretty moot anyway (i.e. wait!). YMMV, of course.

[WordIsBond]

What matters is when the last distribution was received, because the two year period refers to the tax treatment of a distribution.

In reference to the two year period, yes, that is what matters. In either case, he'd be on the wrong side of that guideline, so it doesn't matter for that anyway.

But that's not the only guideline. Intent matters (condition C).

And if he stopped trading, began the winding up process, and became an employee 15 months ago, gets made redundant this month, and starts contracting again in April after a respectable job search for another permie role, it's going to be very hard for them to argue his intent was to gain a tax advantage.

But if he began the winding up last summer, months after becoming an employee, then the picture looks much worse for him, IMO.

[jamesbrown]

I guess one question is how large was the distribution. If it was a £100k distribution, HMRC will be more interested in changing that from CGT to dividend tax. If you're talking £10k, then its probably not worth scrapping over.

Well, it isn’t going to be less than 25k, which is the limit for a capital distribution through a simple striking off. Below this, an MvL makes no sense.

[chopper]

I guess one question is how large was the distribution. If it was a £100k distribution, HMRC will be more interested in changing that from CGT to dividend tax. If you're talking £10k, then its probably not worth scrapping over.

[Maslins]

I'd agree with the comments above.

You probably would be safe to revert to contracting now, on the basis yours isn't a clear cut case of abuse and you have some evidence to suggest you never planned it as things now are.

However, if I were in your shoes I wouldn't want to take the risk. Often the difference between CGT on those distributions and dividend tax can be massive. Why put that at risk, even if it's a low risk, when it's just for a modest extra length of time?

[jamesbrown]

What matters is when the last distribution was received, because the two year period refers to the tax treatment of a distribution. Remember this is not a well-tested area of law w/r to contractors, so some caution is warranted, especially if relying on tax not being a primary motivation (the fourth condition in the TAAR, IIRC). While the preliminary guidance from HMRC appeared to suggest the main purpose test in the TAAR focused on the most aggregious cases (e.g. taking a capital distribution after each contract), you cannot rely on that being their interpretation in future. The absence of a clearance procedure is telling. If it were me, I’d operate through an umbrella for a while.

[WordIsBond]

I would not necessarily assume that was the case. You might have a look at this.

There are three conditions. Chris Maslins wrote about it here, but those conditions come straight out of the legislation.

Check out condition C.

If you really closed down in late 2016, went and took a permie job, and are then made redundant in 2018 and can't find other permie work, it would be pretty hard for them to prove condition C (you were trying to gain a tax advantage) applies. You'll need to prove you were in regular PAYE employment the whole time, and prove that you were made redundant (those things should be easy to prove). If a lot of money is at risk you might be wise to keep evidence of a serious job hunt for a new permie position before you run back to contracting.

But what do you mean by "closed" your company? Did you legally close it in 2016, or just stop contracting then? I ask because it seems a long time between 2016 and September 2017, and if HMRC is looking at 9/17 as your closing date rather than 12/16, starting up again in early 2018 isn't going to fly.

[zappakat]

Cheers James.

Yeah I had a feeling that would be the case.

[jamesbrown]

Based on that thread would there be any issue from HMRC if I opened up a new company should that happen?
Would it make any difference if I went though an Umbrella instead?
Or am I screwed and need another permie role?

With the recent changes to the TiS legislation, it is now clear that you cannot engage in the "same or a similar trade or activity" within a two-year period, so it is highly likely that you would be caught, assuming you intend to conduct a similar trade to the one in which you engaged during that two-year period (and it would be broadly interpreted, like "software development", for example). Previously, the period of time was ambiguous. In terms of returning to an umbrella, the consensus among professionals is that this would be fine, because you are an employee of the umbrella (but it's a complex area of law and they could turn out to be wrong, many years hence).

[zappakat]

I've done a bit of looking and found this thread:-

https://forums.contractoruk.com/acco...quidation.html

But as it was dated 2015 I just wanted to check.

I closed my company at the end of 2016, however the MVL didn't complete until September last year.
I'm currently in permieland but unfortunately there is a real possibility of redundancy.

Based on that thread would there be any issue from HMRC if I opened up a new company should that happen?
Would it make any difference if I went though an Umbrella instead?
Or am I screwed and need another permie role?

The only reason I ask is that there seem to be more contract roles available in the area at the moment than permanent roles.

Thanks