Reply to: Shuting Businesses To Claim Entrepreneur Tax Relief - Then reopen And Then

[Robot]

From HMR&C

INS45010 - Successor companies: Introduction: What's the difference between a successor company and a phoenix company?

Successor companies are defined at INS45005. These companies are sometimes called phoenix companies because they ‘rise from the ashes’ of the liquidated company.

This guidance does not refer to them as phoenix companies because ‘phoenixism’ is generally viewed as detrimental to the Department.

But the creation of a successor company is generally to be encouraged for various reasons

•A successor company will generally pay more for the assets of the liquidated company resulting in higher dividends to creditors.

•It is better that the trade of the liquidated company is somehow continued thereby contributing to the economy through employment, payment of taxes and products.
Where the creation of a successor company is part of a deliberate strategy by the directors to avoid Crown debt, or other debt, then it can be said to be detrimental to the Department. Situations like this are described as ‘contrived liquidations’


INS45005 - Successor companies: Background: What is a successor company?

For the purposes of this guidance successor companies (often called ‘phoenix companies’) are companies set up to continue the trade of the previous failed company with the same directors or company secretaries, often trading from the same business premises with the same assets and employees.

The previous liquidated company and the successor company can be linked in several ways, but the following links are ones which may give a reason to consider whether the successor company and the previous company deserve further consideration:

•Are the directors the same or is there evidence that the directors of the previous company are connected with those of the successor company, or involved in its management?

•Is the successor company carrying on the same trade as the previous company?

•Are the employees the same?

•Is the trading or company name the same or similar?

•Are the trading premises the same?

•Did the successor company acquire assets from the previous company?

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Under ESC 16 you liquidate the company.

Robot

[Fred Bloggs]

.........and a huge magnet to attract Hector if he thinks he can put you through the HMRC mincer to relieve you of your £250k. That's just one reason why I keep the bare minimum of cash to cover outgoings in my business bank account.

[Olly]

ooooooooooorrrrrrrrr
leave the money in the company and pay it out as further dividends in your retirement (or as an emergency/major investment fund)
tax is the same, you don't have to loose a fortune as your pension crashes in value.

yes pension contributions are inoculated against IR35 and the gov might change laws and mess up the devious plan but it's the route I'm going down.

Also ensures there's plenty in Ltd if I decide (or am forced to) take time off.

What I really can't understand is all this talk about investing the retained profit being seen as changing the companies core business and whatever that entails.

What do big Ltds do with their profit? Stick it in Scottish widows like me? Nah didn't think so.

I'm aiming to do a solid run off work over the coming 5 years say which would see a substantial retained profit (250K). Surely too much just to sit earning poor business interest rates?

[Fred Bloggs]

I recall that SJD Accounting used to promote running a Ltd Company where you took minimum wage, drew dividends below the 40% threshold and then every few years wrapped the company up and made capital distribution from the Ltd Co. SJD had a pdf download on their website that illustrated the % retention that could be acheived given different levels of turnover. SJD used to promote this as the most tax efficient way of running a Ltd Co. I looked into this way of working about 7 years ago when I was first setting out on my contracting career. I emailed SJD as I was concerned about doing this repeatedly and, fair enough, Simon D duly answered by saying that they'd never had an issue from HMRC with contractors doing this.

It would be interesting to Know if SJD still promote this method of working and if not, why not.

[MrRobin]

Er I thought the budget said you can now get relief on up to 2 million not one?

Oh! I see... OK thanks. The BBC summary was ambiguous.

Ta.

[Olly]

It was announced today that Entrepreneur's relief on capital gains tax would be doubled. To me and my maths this means the effective rate would now be 2% which makes closing down the company to extract the extra cash sitting around very attractive.

Has there been any more experience amongst forum members or accountants who read this board about how this works for contractors with limited companies?

Er I thought the budget said you can now get relief on up to 2 million not one?

[MrRobin]

It was announced today that Entrepreneur's relief on capital gains tax would be doubled. To me and my maths this means the effective rate would now be 2% which makes closing down the company to extract the extra cash sitting around very attractive.

Has there been any more experience amongst forum members or accountants who read this board about how this works for contractors with limited companies?

[ratewhore]

You wouldn't have got entrepreneurs relief then - that's what the letter is about.

You're quite right. Good point. Well made.

[PhilAtBFCA]

Esc16

Hi all,

ESC16 is the concession whereby HMRC can agree to the shareholders funds being distributed as capital gain rather than dividend income. Full details on the circumstances under which you get the prior agreement of HMRC are here

The tax rate on capital gains will be 18% after the tax free band in the year, but entrepreneurs relief willl apply on gains up to £1M in the lifetime of the entrpreneur ( not per company), and so the effective rate is 10%.

The ESC16 is under review at the moment as HMRC are aware of its abuse.

Under the terms of the issue of the ESC16 you do not, as an entrepreneur, say that you wont set up another company ever again, so you can see how this situation could be used, HMRC could however attack a serial entreprenuer if indeed that serial entrepreneur was just reforming companies succesively only to "avoid" tax. Whether that attack would succeed would be a matter for the courts, its a case of "do you want to be that person ?".

Phil

[XLMonkey]

My accountant has advised it's perfectly OK to shut down and reopen, and has in fact advised me to do it. I mentioned the above, and he said he keeps hearing about this kind of thing from Internet forums, but that nobodoy ever has a problem. He is from one of the well recognised accountancy names that we all know and love.

Hmm, my accountant advised the opposite. I think I might need to change....!

[Old Greg]

Nope, it isn't. (well, technically its in breach of the HMRC tax exemption rules, but on this one rare occasion, HMRC rules and legal amount to the same thing)

To get the tax relief, HMRC require you to write a letter confirming, amongst other things, that the business has ceased trading and that there is no prospect of the director(s) continuing in that trade. If you write this letter, but then set up a new company and continue trading, then they can 'ave you.

My accountant has advised it's perfectly OK to shut down and reopen, and has in fact advised me to do it. I mentioned the above, and he said he keeps hearing about this kind of thing from Internet forums, but that nobodoy ever has a problem. He is from one of the well recognised accountancy names that we all know and love.

[BrilloPad]

Do you mean by closing the Co down, or is there another way to take money out as capital gains whilst keeping the Co running?

Closing down the company.

[Moscow Mule]

I filled in the forms, got the relief, moved on. Now contracting under another business as I wanted to rebrand and relieve myself of the existing partner relationships etc etc etc.

No comeback, no problem. And that's a few years back.

That is my experience, fwiw!!

You wouldn't have got entrepreneurs relief then - that's what the letter is about.

Entrepreneurs relief is given on the 18% rate of CGT when closing your business - it's intended to protect folk who've run their business for their whole lives from the removal of taper relief.

[Bengal]

......attracting only 10% in CGT?......

I think the CGT regime changed in April 2007. There is no longer taper relief and a flat rate of CGT which is 18% (still better than income tax).

[ratewhore]

Neither do I.

I had to write a letter saying that the company would not trade and pay all its taxes and creditors.

However, I have not been through the application for Entrepreneurs' Relief on the SA return yet so I am not at the end of the process.

I filled in the forms, got the relief, moved on. Now contracting under another business as I wanted to rebrand and relieve myself of the existing partner relationships etc etc etc.

No comeback, no problem. And that's a few years back.

That is my experience, fwiw!!