Reply to: 'Entrepreneurs Relief' for limited company what is the best strategy to apply for it?

[Bradley]

Rip esc c16

Hang on ... isn't ESC C16 part of Entrpreneurs Relief where you pay 10% on 'all' of any £5 million over a lifetime evertime you shutdown a company and successfully qualify for it ? what is this £4,000 limit for the 10% CGT ? is ESC C16 and Entrepreneurs Relief part of the same thing or are they completely seperate things ?

First of all the lifetime limit is £10m - if only!

ESC C16 refers or referred to a procedure whereby you could ask the Revenue for permission to treat dividends paid when informally winding-up as if they were capital gains. The Entrepreneur's Rate - the relief part was abolished with effect from June 2010 - of 10% applies to capital gains. That's the connection.

What I'm saying is that the Revenue will no longer give their permission for the treatment of certain dividends as capital gains if those dividends exceed £4,000. That is because all Extra Statutory Concessions (ESCs) are no longer operated by the Revenue due to the fact that they lost a case which hinged on the Revenue refusing to give permission under the ESC process. As ever the Revenue threw their teddy out the pram and this is the upshot - hardly proportionate is it?

[eliquant]

This means that you can't get ESC C16 any more on amounts over £4,000.

If you had reserves of £90,000 then you would pay 10% CGT on £4,000 and 25% effective rate on £86,000.

Hang on ... isn't ESC C16 part of Entrpreneurs Relief where you pay 10% on 'all' of any £5 million over a lifetime evertime you shutdown a company and successfully qualify for it ? what is this £4,000 limit for the 10% CGT ? is ESC C16 and Entrepreneurs Relief part of the same thing or are they completely seperate things ?

[eliquant]

If you went for liquidation what negative impact does that have ? will it give the director a bad credit rating for the future ? and what are the tax benefits of liquidation / insolvency ?

[Bradley]

4th Technical Consultation

My accountant told me that there will be a 'formal' winding up process on all ltd's next calendar year - which will cost £k's in fees from a insolvency firm.

so...how does one get the money out of the company?

a. leave it in a drip it out as usual

b. pay 18%

c. ?

Your accountant no doubt is referring to the 4th Technical Consultation on the withdrawal of Extra Statutory Concessions. At a time yet to be determined - probably after the summer - you won't be able to treat capital distributions from informal striking-off procedures as capital if the payments are more than £4,000.

This means that you can't get ESC C16 any more on amounts over £4,000.

If you had reserves of £90,000 then you would pay 10% CGT on £4,000 and 25% effective rate on £86,000.

The only way round this is to pay a licensed insolvency practitioner to liquidate the company for you at an average cost of say £2,000.

[jimbob12]

How much is a reasonable fee to close a company down using ESC16 route ?

[Fishface]

My accountant told me that there will be a 'formal' winding up process on all ltd's next calendar year - which will cost £k's in fees from a insolvency firm.

so...how does one get the money out of the company?

a. leave it in a drip it out as usual

b. pay 18%

c. ?

[Clare@InTouch]

With regards to "Entrepreneurs Relief" ... anyone know the minimum time limit between you shutting down the limited company (and ceasing trading in IT) and then starting up a new Limited company doing the same thing ? is it 6 months / 1 year ? would you have to go via an umbrella in the interim (not v. tax efficient but could Companies House not allow you to set up a Limited Company for trading in IT contracting forever ???!??).

Also what happens if you apply for ESC C16 and HMRC say no you cannot get the 10% tax on Capital gains, can you then back peddle and not proceed with the application ? (I bet in this case there is scope for administration error where someone in HMRC applies to Companies House regardless and your Company is applied to be struck off without your knowledge thus having your assets frozen !).

When you apply for ESC C16 you sign a declaration stating that you are ceasing to trade - obviously you need to be able to prove this was the case in case it's questionned at a later date. Starting a new company 2 months later would be an obvious ruse.

It's not a case of Companies House not allowing you to set up a company, they will allow you to set up as many as you like. The point is that if you tell HMRC you're ceasing to trade and they then investigate at a later date and find you lied, the ESC should not have been given and they will penalise you.

If you apply for ESC C16 and it's refused then you won't be able to take the final money as a Capital Gain. You can back out of the closure process at any time up to the point the company is struck off (and even after then really if you apply for restoration).

The 10% is Entrepreneur's Relief claimed on your personal tax return - it's not part of the company closure itself.

HMRC cannot apply to have you company struck off. The DS_01 form requires the signtures of the shareholders, and the intention to strike off is advertised for at least 3 months prior to the actual dissolution. Companies House will also write to the Director a couple of times before it's done.

[Clare@InTouch]

Could you clarify what you mean by a large sum?

My understanding is that there is a life time limit of x pounds, surely anything up to that can be taken without any issues?

Thanks

There's a maximum lifetime limit on the amount of Entrepreneurs' Relief you can claim on qualifying gains:

the first £1 million from 6 April 2008 to 5 April 2010
the first £2 million from 6 April 2010 to 22 June 2010
the first £5 million from 23 June 2010

Entrepreneurs' Relief | Business Link


The issue is that if your company is deemed to be an investment company then it may not qualify for ER in the first place as it won't meet the definition of a trading company.

HM Revenue & Customs: Capital Gains Tax reliefs for business assets

[sbakoola]

With regards to "Entrepreneurs Relief" ... anyone know the minimum time limit between you shutting down the limited company (and ceasing trading in IT) and then starting up a new Limited company doing the same thing ? is it 6 months / 1 year ? would you have to go via an umbrella in the interim (not v. tax efficient but could Companies House not allow you to set up a Limited Company for trading in IT contracting forever ???!??).

Also what happens if you apply for ESC C16 and HMRC say no you cannot get the 10% tax on Capital gains, can you then back peddle and not proceed with the application ? (I bet in this case there is scope for administration error where someone in HMRC applies to Companies House regardless and your Company is applied to be struck off without your knowledge thus having your assets frozen !).

[badger7579]

interesting read
<snip>

[castoff101]

2) There is the theory that if you have large amounts of cash then HMRC may view the company as an investment company, rather than a trading company. In that case ER would not apply.

Could you clarify what you mean by a large sum?

My understanding is that there is a life time limit of x pounds, surely anything up to that can be taken without any issues?

Thanks

[Clare@InTouch]

I am considering applying for 'Entrepreneurs Relief', my limited company is 2 years old and I've got around 90k in it right now. I heard that if you qualify (via HMRC) you can shut down the company (and after all outstaning VAT, income tax and Corporation tax is paid) you can then take the remaining amount in your company bank account at 10% capital gains tax, not bad I thought.

I heard that the entire procedure takes around 1 year and there is a lifetime limit of around £5 million, by the time I shut down I should have around £150k in the account after tax.

My questions to you all are:

1) If I decide to go for Entrepreneurs Relief and then discover via HMRC that my company does not qualify for the 10% capital gains tax (i.e. the higher rate) can I back out of proceeding with the E.R. and just carry on trading as normal ?

2) I haven't read all the rules regarding how one qualifies for the 10% capital gains tax on all company account money left after tax but I did understand that the longer you leave it and the more money you accumulate the harder it is to convince HMRC that you qualifiy for the low 10% tax, its something to do with trading income vs what is left in the account I think, not sure, could someone clarify this for me ?

3) Have you ever undergoine an 'Entrepreneurs Relief' procedure for an IT Consultancy ? did it run smoothly ? what are the pitfalls ? i.e. if you don't file something they freeze your company bank account without warning.


I'm with one of the big IT accountants so I will ask them if they do it but they don't tell you everything so this is why I have asked these questions about Entrepreneurs Relief.

thanks in advance.

1) When you decide to close a company your accountant will write to HMRC to request ESC C16. Part of this procedure is you signing a declaration to say you're actually ceasing to trade (ie not about to open a new company diong exactly the same thing). If the ESC is agreed then the accounts are prepared with any final monies being shown as a Capital Distribution. The accounts are filed with HMRC and Companies House, taxes paid, and then the company is struck off.

ER is done through your tax return. By the time it gets to that stage the company should be struck off, so no, you cannot go back and carry on trading.

2) There is the theory that if you have large amounts of cash then HMRC may view the company as an investment company, rather than a trading company. In that case ER would not apply.

3) I have overseen the closure process for many clients, and it's usually absolutely fine as long as the process is followed. The company bank account has to be closed before the final accounts are prepared, so that's not an issue at all in respect of the ER. However, if for any reason you don't close it before the company is struck off then your bank account will be frozen and any monies passed to The Crown under Bona Vacantia. You can get most of them back, but it's a potentially long process. This is why it's vital to get proper advice when closing a company, and to close the account when your accountant tells you to.


I'd suggest you talk it all through with your accountant. They know you personal circumstances in full and can advise on anything I wouldn't be aware of.

There are also some possible changes in the pipeline for ESC C16, although it's still being debated at the moment.

[Gonzo]

3) Have you ever undergoine an 'Entrepreneurs Relief' procedure for an IT Consultancy ? did it run smoothly ? what are the pitfalls ? i.e. if you don't file something they freeze your company bank account without warning.

There isn't an 'Entrepreneurs Relief' procedure as such.

The relief is something that you claim in your personal tax return when filing for the year in which you took the capital gain.

You (or your accountant) will need to write to HMRC asking for their permission to close the company without the formal winding up procedure, this concession is ESC16, but I don't think that they tend to say no unless you do this a lot.

[sbakoola]

Remember, you can't just close the company down and then open another one to continue your contracting. The whole point of ER is that it's only supposed to be used when you are ceasing to trade in that business.

I guess theoretically you could close the company, then join an umbrella for 6 months or so, and then open another Ltd company again.

that sounds crazy to me...

[ChimpMaster]

Remember, you can't just close the company down and then open another one to continue your contracting. The whole point of ER is that it's only supposed to be used when you are ceasing to trade in that business.

I guess theoretically you could close the company, then join an umbrella for 6 months or so, and then open another Ltd company again.