Reply to: Applying for taper relief before April

[philip@wellwoodhoyle]

There is another aspect that I don't think has been clearly made on this thread.

That is when a company applies under ESC C16, HMRC usually write back to give their approval to the company being wound up using the informal voluntary route, rather than formal liquidation. Their reply letters never mention their agreement to CGT treatment of the distribution.

In their manual (Inspectors Bible), they actually say that the inspector can retrospectively say that the distribution is liable to income tax (i.e. as a dividend) rather than CGT in cases where they identify a tax saving motivation for the company being wound up.

I've never heard of them challenging in this way, but it is something else up their sleeve and something I always warn clients about "just in case".

[mace]

I think there are 2 elements to this. The chances of you being challenged in the first place are pretty slim, I reckon. Historically I would have said in the region of 1%. There will probably be more scrutiny than usual between now and 05/04/08 as I would imagine there will be a plethora of liquidations.

If challenged, I don't think it would take Miss Marple to establish that there were some shenanigans afoot.

I think the advice that's been given that you can create a phoenix company every 3 or so years is very dodgy. The consequences could be that, if caught, you'll have to pay back the tax advantage you received when dissolving the predecessor companies plus penalties and interest and also be disqualified as a director if the Revenue see that you've been doing this multiple times. ESC stands for Extra-statutory concessions. The concession is there to reduce the tax bill for companies that have genuinely failed and for retirees. It's not intended to be given out as a form of tax relief every now and again. The HMRC will look to see things such as how well the predecessor companies were trading prior to their dissolution. Clearly, if they were turning a good profit then the reason for dissolution is very suspicious.

Remember an accountant's motive is to make money. The legal consequences generally fall on ourselves.

[TheFaQQer]

If challenged, I don't think it would take Miss Marple to establish that there were some shenanigans afoot.

I've always found her advice useful - the tip on transposed numbers resulting in a multiple of 9 when Sock Puppet's accounts were out by £45 was a handy one.

[THEPUMA]

I think there are 2 elements to this. The chances of you being challenged in the first place are pretty slim, I reckon. Historically I would have said in the region of 1%. There will probably be more scrutiny than usual between now and 05/04/08 as I would imagine there will be a plethora of liquidations.

If challenged, I don't think it would take Miss Marple to establish that there were some shenanigans afoot.

[Old Greg]

See this first

http://www.hmrc.gov.uk/manuals/ctmanual/CTM36850.htm

and then point e on

http://www.hmrc.gov.uk/manuals/ctmanual/CTM36875.htm

Basically the upshot is that if you close down oldco and set up newco to continue the trade you are pushing your luck to expect capital treatment on the liquidation of oldco.

Just out of curiosity, what does open mean - I assume it's director, not shareholder.

If I'm director of MyCo and close it down, and then Mrs OG opens HerCo as Director with me having 2 shares and her 1 (same as MyCo), will our friends at HMRC see through it?

[THEPUMA]

See this first

http://www.hmrc.gov.uk/manuals/ctmanual/CTM36850.htm

and then point e on

http://www.hmrc.gov.uk/manuals/ctmanual/CTM36875.htm

Basically the upshot is that if you close down oldco and set up newco to continue the trade you are pushing your luck to expect capital treatment on the liquidation of oldco.

[minstrel]

2. However, the ESC C16 requires you to confirm that you will not immediately re-commence trading in a similar line of business.

I don't think that is the case.

Read the conditions at http://www.hmrc.gov.uk/manuals/ctmanual/CTM36220.htm

Conditions of ESCC16
The conditions applicable to ESCC16 are as below.

The company is not one which, if the distributions were made in a winding up, would be reported to the Anti-Avoidance Group (Intelligence), Clearance and Counteraction Team in respect of ICTA88/S703 under sub-paragraphs (e) or (f) of CTM36875.
The company is not the subject of an investigation either on its own or as part of an enquiry embracing individuals or other companies.
The company satisfies the Inspector that:
(a) it does not intend to trade or carry on business in future, and

(b) it intends to collect its debts, pay off its creditors in full and distribute any balance of its assets to its shareholders (or has already done so), and

(c) it intends to seek or accept striking off and dissolution.

The company and its shareholders agree that:
a) they will supply such information as is necessary to determine, and will pay, any CT liability on income or capital gains and any ACT liability under ICTA88/SCH13 due on distributions made prior to 6 April 1999.

(b) the shareholders will pay any CGT liability (or CT in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made during a winding-up (see CG40430 to CG40433).

[minstrel]

I'm not an accountant, so hadn't thought of it that way. I see were you guys are coming from now.

For those who don't understand the CGT taper relief, if I'm understanding correctly, the taper relief applies from when you first bought the shares. So when you start up the company, shares are created in the company at that point. Keeping retained profit each year is similar to boosting the share price. The capital gain will be the difference between the retained profit when you sell and the nominal value paid for the shares at company startup (normally £100).

Therefore, prior to April 2008, assuming you close the company every 3 years and make £80k in profits before tax each year

Paying out in dividends would cost you and the company):-
40% of £80k = £32k per year. £96k in total from £240k profits

Retaining profits and closing company at end of year 3 would have cost:-
20% of £240k (corporation tax) + 25% of 40% of £192k (CGT on retained profit after corporation tax) = £48k+£19.2k = £67.2k
This means that you could save £28.8k in taxes (£9.6k per year)

After April 2008, it will be:-
20% of £240k (corporation tax) + 18% of £192k (CGT on retained profit after corporation tax) = £48k + £34.56k = £82.56k
This means that you will save £13.64k in taxes (£4.547k per year)

I've had 4 accountants since I've been running a limited company. None of them have pointed out the above before

You're missing the fact that the tax rate is only 40% over around £40k. Do it right and you'll never break that threshold in the old capital distribution route.

You can pay upto higher rate threshold in dividends with no addional personal tax to pay. This is better than CGT.

Also there is a £9,200 capital gains allowance.

So, if we assume you have £35k per year basic rate allowance, a more efficient solution is to distribute £31.5k in years 1 and 2 (remember to take into account 10% dividend credit) and then make a capital distribution of the remaining £129k. The £9,200 CGT allowance means your captial gain is around £120k. Taper relief means you only pay tax on 25% of £120k = £30k. £30k is in your basic rate allowance so you only pay 20% of this tax = £6k.

Add the £48k CT you've paid and this gives you total tax of £54k.

The full dividend route would be roughly 20% of £240k = £48k. Knock off 3 years of £31.5k dividend payments (£94.5k) gives a remainder of £97.5k which you would have to pay £24,375 tax. Total tax paid £72.4k.

Post April 2008 capital distribution route would be £48k + £88.5k @ 18% = £63.9k (might as well do £31.5k dividend distribution all 3 years as CGT is 18% flat rate).

So dividend route is £72.4k of tax

Old capital distribution route is £54k (£18.4k saving)

New capital distribution route is £63.9k (£8.5k saving)

[dude69]

http://www.hmrc.gov.uk/manuals/insmanual/INS9732.htm

HMRC could consider you unfit to be a director if

"Successive failed companies were run by the same persons with the same or near identical trading name likely to mislead people to think that one continuous business was being run.

Phoenixism: The company was a successor to a failed company run by the same persons in the same or related trade.

Contrived Liquidation: where a company was incorporated shortly before a first company run by the same persons in the same or related trade failed
or

Companies run in tandem sharing contracts, assets, employees, which were transferred to the second company in anticipation of the first company failing."

Doesn't say anything about tax-motivated closure. This is all about failed companies or misleading names

[mace]

Probably worth reading this

http://www.hmrc.gov.uk/manuals/insmanual/INS9732.htm

HMRC could consider you unfit to be a director if

"Successive failed companies were run by the same persons with the same or near identical trading name likely to mislead people to think that one continuous business was being run.

Phoenixism: The company was a successor to a failed company run by the same persons in the same or related trade.

Contrived Liquidation: where a company was incorporated shortly before a first company run by the same persons in the same or related trade failed
or

Companies run in tandem sharing contracts, assets, employees, which were transferred to the second company in anticipation of the first company failing."

[Old Greg]

I'm not saying that that's what they recommend at all. All I'm saying is that these regulations are open to a certain amount of interpretation that which remains within the law.

SJD do recommend this (or were before the budget). They have a 'bespoke report' on their website - I'll have a look for the link tomorrow.

[Andy2]

.

2. However, the ESC C16 requires you to confirm that you will not immediately re-commence trading in a similar line of business.
year.

so how can one get around this requirement.
Surely one has to open another company and carry on working.

[mace]

I'm not saying that that's what they recommend at all. All I'm saying is that these regulations are open to a certain amount of interpretation that which remains within the law.

True. But the law makes you responsible not the accountant, which means you'll end up paying should the interpretation not be in your favour. Under those circumstances, you would be sensible to complain about the advice you'd been given to the professional body governing SJD, however, if they have given you this kind of advice.

If you want to make a few grand and hope that the tax inspector doesn't cotton on to it then that's your worry, but there was no mention that any of this was potentially unlawful in the multiple threads I've read regarding CGT taper relief since the pre-budget report came out.

[Ruprect]

If that's what SJD are recommending then they'll be in serious trouble if one of their clients gets investigated by HMRC and the tax relief they acquired when closing down a previous company falls foul of the law. That would definitely be a professional misconduct charge.

I'm not saying that that's what they recommend at all. All I'm saying is that these regulations are open to a certain amount of interpretation that which remains within the law.

[Lockhouse]

If you also make your wife a director, you could chance your arm that they'll not investigate and double the CGT allowance making even more savings. I think the HMRC could easily become a victim of unforeseen consequences.

My missus is already a director but owns no shares. I might try transferring her 50% of the shares after I pay my last dividend (to avoid income splitting) but before the company is closed down so I can use her CGT allowance as well. It's not illegal (yet). They can investigate all they like, but I'll have done nothing wrong. Like you say, unintended consequences will come back and haunt them.