Reply to: How often do you close your company down?

[Clare@InTouch]

Claire

Assuming a company was closed via esc16 in Feb 2012.

What would be a reasonable date to open up a new company. I agree it is nothing more than a gut feeling.

October 2012
March 2013

It depends on whether you could show there were commercial reasons for closing in February. Say you closed because you lost work, or went abroad, or wanted to retire. Then changed your mind because you got a new contract that was too good to refuse. That would show you did it for a reason that wasn't motivated by tax, so you'd have a good argument in my view.

[drumtochty]

Claire

Assuming a company was closed via esc16 in Feb 2012.

What would be a reasonable date to open up a new company. I agree it is nothing more than a gut feeling.

October 2012
March 2013

[Maslins]

I recall when I applied for ESC C16 I had to give a "I'm quitting this line of business" undertaking (I don't know what would have happened had I breached this, all very messy if caught I imagine).

...

Certainly without substantial break it is very difficult to see any commercial justification for the action. I suppose one could try an argument that you wanted to put the assets beyond the reach of potential claims by customers should things all go wrong, but that would be very tenuous at best.

My interest was mainly "how would they attack it, because I don't know", not "I don't think they can". I think the TIS regulations, and their potential implications are often overlooked. I guess it's just another weapon in HMRC large armoury!

Like you say, part of the ESC C16 processed involved you promising you wouldn't start up the same thing again.

My take is that the transactions in securities rules revolve around transferring the trade of the company prior to closing it down. This is the only way I think you _could_ be caught, closing down and starting a new company every few years.

With a typical contractor business, there isn't really much trade to speak of (ie when you stop one contract, until you start the next one there isn't really a business there). Assuming your new company would have a new name, you could easily get a new website etc so any branding is very different. Combine with that you'd presumably only ever do it in between contracts, meaning your new company's first client wouldn't be the same as your old company's last client...I personally feel HMRC would struggle to argue there was a transfer of trade. Might be worth using it as an excuse to get a new Macbook Pro too

...but yes, if someone's earning massive sums and doing it every year, it'd be provocative to say the least. Every 3-5 years I'm sure most people could come up with some plausible commercial reason for doing it.

[Clare@InTouch]

Clare,

I recall when I applied for ESC C16 I had to give a "I'm quitting this line of business" undertaking (I don't know what would have happened had I breached this, all very messy if caught I imagine).

Certainly I wouldn't assume pheonixing was suddenly risk free. I can also see that ER is in effect in the gift of the inspector and would be difficult to get away with regularly.

I just wonder though whether pheonixing without ER would be problematic. In this case there isn't much in the way of a tax advantage (in effect you'd just get to use your capital gains allowance). Given the costs of MVL this would be pointless overall anyway.

Certainly without substantial break it is very difficult to see any commercial justification for the action. I suppose one could try an argument that you wanted to put the assets beyond the reach of potential claims by customers should things all go wrong, but that would be very tenuous at best.

My interest was mainly "how would they attack it, because I don't know", not "I don't think they can". I think the TIS regulations, and their potential implications are often overlooked. I guess it's just another weapon in HMRC large armoury!

Don't get me wrong, I don't disagree at all. How HMRC would approach this is an unknown, it's just that the means are there should they wish to. Like many things, I think it depends on how much you push your luck.

Say you take enough dividends for two years to reach higher rates for you and the wife, then dissolve with a £24k capital gain (so no MVL necessary) CGT allowance plus ER equals around £1k in tax. Then you do it again when you start and dissolve a second company. So you've (and the wife) have had (say) £200k with only paying £4k in tax plus CT. I can see them not liking it, and invoking anti-avoidance provisions.

With the changes to ESC and MVL, we'll wait and see who the test case will be!

[cojak]

How often do you long-termers close the company down and take the money out, before starting a new one?

Every year?
Every couple of years?
Once you have accumulated 200k or more in it?
Never?

Thanks.

Never.

[BolshieBastard]

How often do you long-termers close the company down and take the money out, before starting a new one?

Every year?
Every couple of years?
Once you have accumulated 200k or more in it?
Never?

Thanks.

Every 4 or 5 years. Take all money out then close it.

[ASB]

As far as I know, HMRC haven't used this in practice. That's not to say they wouldn't though, especially now that the ESC C16 restriction on phoenix companies is no longer providing the same deterrent. I have to admit I've not researched in detail, but I think it's enough just to advise caution - just because ESC C16 is gone, you shouldn't just assume phoenixing is suddenly risk free.

Clare,

I recall when I applied for ESC C16 I had to give a "I'm quitting this line of business" undertaking (I don't know what would have happened had I breached this, all very messy if caught I imagine).

Certainly I wouldn't assume pheonixing was suddenly risk free. I can also see that ER is in effect in the gift of the inspector and would be difficult to get away with regularly.

I just wonder though whether pheonixing without ER would be problematic. In this case there isn't much in the way of a tax advantage (in effect you'd just get to use your capital gains allowance). Given the costs of MVL this would be pointless overall anyway.

Certainly without substantial break it is very difficult to see any commercial justification for the action. I suppose one could try an argument that you wanted to put the assets beyond the reach of potential claims by customers should things all go wrong, but that would be very tenuous at best.

My interest was mainly "how would they attack it, because I don't know", not "I don't think they can". I think the TIS regulations, and their potential implications are often overlooked. I guess it's just another weapon in HMRC large armoury!

[Clare@InTouch]

Here you go, this explains it quite well:

For those unfamiliar with this subject, perhaps I should start with a very short description of the purpose of the current rules, which allow HMRC to ‘counteract’ a tax advantage obtained by a taxpayer in consequence of:

a transaction in securities; or
the combined effect of two or more transactions in securities; or
the combined effect of one or more transactions in securities and the liquidation of a company.
The term ‘transaction in securities’ has a very wide meaning including transactions of whatever description relating to securities (including their purchase, sale or exchange, issue or securing the issue of new securities, etc.).

The term ‘securities’ is also widely defined. The TiS rules will not apply if conditions A and B in ITA 2007 s 685 are met.

Condition A is that the transaction or transactions are effected for genuine commercial reasons, or in the ordinary course of making or managing investments.

Condition B is that enabling Income Tax advantages to be obtained is not the main object or one of the main objects of the transaction or transactions.


In broad terms, under the proposed new TiS provisions a person is potentially caught if the following conditions are satisfied (proposed new s 683):

the person is a party to one or more transactions in securities; and
certain defined circumstances are present; i.e., if conditions A or B (sound familiar?) are in point, and there is no ‘fundamental change of ownership’ (see below); and
a main purpose of the person being a party to the transaction(s) is to obtain an ‘Income Tax advantage’, as defined (the ‘purpose test’, or what is sometimes referred to as the ‘motive defence’, ‘escape clause’ or ‘commercial let-out’, in s 685); and
the person obtains an Income Tax advantage.

Transactions in Securities - New and Improved?


As far as I know, HMRC haven't used this in practice. That's not to say they wouldn't though, especially now that the ESC C16 restriction on phoenix companies is no longer providing the same deterrent. I have to admit I've not researched in detail, but I think it's enough just to advise caution - just because ESC C16 is gone, you shouldn't just assume phoenixing is suddenly risk free.

[d000hg]

Well ESC16 was withdrawn in March/April (forget that date) so only a smallish set amount can be pulled out cheap, the rest is taxed more. It also seems to cost you between £3500 to £5000 to liquidate your company which is the only way now. From what I remember it isn't worth doing below £30k or something lke that. Do a search for 'liquidation' or something similar and you will find the threads discussing it.

So what's the best solution for someone who just wants to stop trading - they go permie, retire, etc - rather than repeatedly closing companies to get the cash out? Does this mean all of us face a fee of a few grand when we retire?

[Clare@InTouch]

Clare,

On what basis could they actually do that? Certainly under the old ESC16 they would be able to. However, the corporate is an individual entity. Full MVL will result in capital distributions assessed accordingly.

This surely would be the worst position possible (whether it would be tax efficient in this case I don't know).

Entrepreneurs Relief is the only additional (and substantial) benefit. However in this case there is no documented description requiring the individual not to carry on in the same line of business.

HMRC may well try and deny ER but I don't really see on what grounds.

Many tax reliefs have a caveat that state they are available unless the sole or main purpose of the arrangement is to avoid tax or obtain tax relief. Obviously most arrangements are partly to avoid tax, but they have a sound commercial element too. It's the same logic that the new General Anti-Avoidance Rule is/will be based on. HM Revenue & Customs

I've read something about the anti-avoidance rules on securities possibly being an issue, I'll see if I can find the exact legislation....

[ASB]

If HMRC see you closing your company every couple years and getting a lot of money out at a low tax rate, therefore indicating you're closing for purely taxation reasons, they are like to challenge it and deny the preferential tax treatment.

Clare,

On what basis could they actually do that? Certainly under the old ESC16 they would be able to. However, the corporate is an individual entity. Full MVL will result in capital distributions assessed accordingly.

This surely would be the worst position possible (whether it would be tax efficient in this case I don't know).

Entrepreneurs Relief is the only additional (and substantial) benefit. However in this case there is no documented description requiring the individual not to carry on in the same line of business.

HMRC may well try and deny ER but I don't really see on what grounds.

[bf2]

OK, my situation is this:

I've got about 100k in the company account, after paying myself the salary and divi within the thresholds.
Wife working full time and is a higher rate tax payer (just). Home mortgage is due to be cleared in another 10 months.
Don't *need* the money in the company account as such, but worried about inflation and the whole financial mess of the world.

[Clare@InTouch]

Well ESC16 was withdrawn in March/April (forget that date) so only a smallish set amount can be pulled out cheap, the rest is taxed more. It also seems to cost you between £3500 to £5000 to liquidate your company which is the only way now. From what I remember it isn't worth doing below £30k or something lke that. Do a search for 'liquidation' or something similar and you will find the threads discussing it.

Would be better to look at your situation and ask what is best for you rather than asking what everyone else does when the legislation has changed. Any answers from before March will no longer help as they were done using a different system.

You're looking at over £50k really for it to be worthwhile, otherwise the tax you save is outweighed by the professional fees.

If HMRC see you closing your company every couple years and getting a lot of money out at a low tax rate, therefore indicating you're closing for purely taxation reasons, they are like to challenge it and deny the preferential tax treatment.

[northernladuk]

"Are you asking about getting the money out cheaply?"

Yes, that. Not IR35.

Well ESC16 was withdrawn in March/April (forget that date) so only a smallish set amount can be pulled out cheap, the rest is taxed more. It also seems to cost you between £3500 to £5000 to liquidate your company which is the only way now. From what I remember it isn't worth doing below £30k or something lke that. Do a search for 'liquidation' or something similar and you will find the threads discussing it.

Would be better to look at your situation and ask what is best for you rather than asking what everyone else does when the legislation has changed. Any answers from before March will no longer help as they were done using a different system.

[bf2]

"Are you asking about getting the money out cheaply?"

Yes, that. Not IR35.