Reply to: ESC16 & reopenig company

[Greg@CapitalCity]

So, the reality is that more people are likely to be able to abuse the system because the prior "clearance" is scrapped, and so HMRC havn't the foggiest idea about what's going on and therefore have a greatly reduced chance of catching the abusers.

In my experience, applying for ESC C16 in itself does not increase the chances of the contractor getting a compliance visit from the HMRC. I think after this change has gone through, the chances of catching the abusers will still be about the same.

@Fishface - I don't see much in the way of tax advantage by closing a company every 3 months, as entrepreneurs relief will not apply.

[Fishface]

The change is that you can't do it for over £25k unless you go down the formal liquidation route, but again this route doesn't have a "clearance" system so again HMRC won't know about it.

So, the reality is that more people are likely to be able to abuse the system because the prior "clearance" is scrapped, and so HMRC havn't the foggiest idea about what's going on and therefore have a greatly reduced chance of catching the abusers.

So the average contractor could shut her own company down 4 times a year and HMRC would know no difference?

[cojak]

And everyone is debating, if in a forthright manner

[waccoe]

If you read the first post in the thread, you'll see why I started this. I thought that this was illegal, which is why I came on here in the first place, to get some facts, not for all the p*ss taking comments.

The fact that contractor forums post articles such as this, <snip> admittedly for contractors retiring or moving back into permanent employment, and also the fact that accounting websites such as this End of ESC C16 (on striking off a company) [Archive] - UK Business Forums state things like this below....

"That's another one of the objections that's been forwarded to HMRC. Under the ESC, HMRC had to give their advance clearance, so one would have hoped that they'd keep an eye open for blatant abuse and of course it was only a concession and could be revoked after the event if the assurances given were broken.

Now, it seems there is no such clearance and as the new proposal is to be law, it seems HMRC won't have the ability to revoke the capital treatment as easily as under the old concession. HMRC are going to have a hard job to object and argue the capital treatment shouldn't apply as they're going to have to use existing anti-avoidance laws which are vague and seldom used."

Make this all a slightly greyer area than nicking a car stereo and shopping people for tax avoidance. There's lots of things we all do to legally avoid paying extra tax, I've just come on here to get a bit of clarity & advice, something I thought these forums were all about.

[TheFaQQer]

I do admit it pisses me off royally when what goes around doesn't come around and then I get both barrels for the slightest thing but jealousy it isn't.

If you know someone who has evaded their tax, then ring HMRC and shop them. Don't think "oooh, they do this, so I'll do the same thing"

Or if you do, don't come bleating that you get screwed by HMRC.

[northernladuk]

When someone smashes a car window, nicks a car stereo, flogs it on and pays no tax, do you feel jealous?

Jealousy of those who break the law seems a strange attitude.

I do admit it pisses me off royally when what goes around doesn't come around and then I get both barrels for the slightest thing but jealousy it isn't.

[TheFaQQer]

No, you are right, I have gone on about this. I think partly I'm jealous of the guys I know who have done this, particularly my friend who withdrew close to 200k and paid very little tax, who is also trying to convince me its just a legal loophole. It is something that I do see as illegal and risky though, so am not seriously considering it, just bouncing ideas really. I'll probably bow out here.

When someone smashes a car window, nicks a car stereo, flogs it on and pays no tax, do you feel jealous?

Jealousy of those who break the law seems a strange attitude.

[waccoe]

You did say that but you have badgered on and on about this which doesn't back up your claims.

No, you are right, I have gone on about this. I think partly I'm jealous of the guys I know who have done this, particularly my friend who withdrew close to 200k and paid very little tax, who is also trying to convince me its just a legal loophole. It is something that I do see as illegal and risky though, so am not seriously considering it, just bouncing ideas really. I'll probably bow out here.

[northernladuk]

That was kinda tounge in cheek, I certainly don't base my business on hoping I don't get caught by HMRC, but I do know plenty of people who do. As I said further up the thread, I'm pretty much risk adverse.

You did say that but you have badgered on and on about this which doesn't back up your claims.

[waccoe]

You kinda of answered your own question. If this is how you run a business you don't deserve one IMO.

That was kinda tounge in cheek, I certainly don't base my business on hoping I don't get caught by HMRC, but I do know plenty of people who do. As I said further up the thread, I'm pretty much risk adverse.

[northernladuk]

what's the downside in just using an ESC C16, and hoping for the best?.

You kinda of answered your own question. If this is how you run a business you don't deserve one IMO.

[THEPUMA]

This is indeed interesting. So if you're thinking of taking a large dividend, which would take you over the 40% threshold anyway, what's the downside in just using an ESC C16, and hoping for the best?. If the worst that can happen is you get taxed on it as if it was a dividend, why wouldn't everyone taking a large dividend just use an ESC C16? Admittedly there'd be some expense in arranging it all, and opening a new company, but as I said before, I haven't heard of a single case, where anyone has had to pay back the tax. You'd obviously need a large sum to make it worthwhile.

As for the changes to ESC C16 coming in on 1/3/12. From my quick google, a simple liquidation procedure would cost between 2-3.5K, with no other HMRC checking on whether the liquidation was valid. Can anyone correct my simple sums, and show me why this doesn't make sense?

Assuming there's 100K capital in the account to make the sums easier, and no other capital gains, and basic rate tax applies. CGT allowance is 10,600 x2 for myself and the other half, who is a 50% director.

100K - 3,000 for costs for liquidation = 97,000
97,000 - (2 x 10,600) = 75,800 for CGT
75,800 @ 18% tax = 13,644 (approx 14K)

So net would be 100K - 3K - 14K would give 83K.

The flaws are twofold. Firstly, the CGT rate would normally be 10%.

Secondly, it doesn't work. Most people are not prepared to base their tax planning on the "it doesn't work but they probably won't look at it" principle. Some are. Harry Redknapp for example allegedly.

[waccoe]

Why doesn't this make sense?

When you close using ESC C16, it is technically a dividend. It is just a dividend which is, by concession, taxed as a capital gain. But if it transpires that you weren't eligible for capital treatment, it would be taxed as a dividend.

This is indeed interesting. So if you're thinking of taking a large dividend, which would take you over the 40% threshold anyway, what's the downside in just using an ESC C16, and hoping for the best?. If the worst that can happen is you get taxed on it as if it was a dividend, why wouldn't everyone taking a large dividend just use an ESC C16? Admittedly there'd be some expense in arranging it all, and opening a new company, but as I said before, I haven't heard of a single case, where anyone has had to pay back the tax. You'd obviously need a large sum to make it worthwhile.

As for the changes to ESC C16 coming in on 1/3/12. From my quick google, a simple liquidation procedure would cost between 2-3.5K, with no other HMRC checking on whether the liquidation was valid. Can anyone correct my simple sums, and show me why this doesn't make sense?

Assuming there's 100K capital in the account to make the sums easier, and no other capital gains, and basic rate tax applies. CGT allowance is 10,600 x2 for myself and the other half, who is a 50% director.

100K - 3,000 for costs for liquidation = 97,000
97,000 - (2 x 10,600) = 75,800 for CGT
75,800 @ 18% tax = 13,644 (approx 14K)

So net would be 100K - 3K - 14K would give 83K.

[northernladuk]

When you close using ESC C16, it is technically a dividend. It is just a dividend which is, by concession, taxed as a capital gain. But if it transpires that you weren't eligible for capital treatment, it would be taxed as a dividend.

Ahh, interesting. Thanks for that.

[THEPUMA]

Really?? That would mean they would be condoning either a) a dividend voucher being backdated or b) a dividend that has not been agreed by the board?

Or have I completely missed the mark here and it is distributed as a dividend when trasferred as part of the ESC/liquidation?

When you close using ESC C16, it is technically a dividend. It is just a dividend which is, by concession, taxed as a capital gain. But if it transpires that you weren't eligible for capital treatment, it would be taxed as a dividend.