Reply to: Tax efficient withdrawal (Closing ltd company)

[Maslins]

I'm in a similar position - my accountant said it should be ok to claim ER but what happens if I pay 3.5k to MVL then apply for ER and get knocked back.

Then I guess (as with deciding other not 100% certain things like whether you're inside IR35 or not) your personal tax return gets enquired into a while after being submitted, they challenge it, and it depends who backs down/whether it goes to court.

The liquidator will have done their bit, so I can't see them offering to refund any money.

I spoke to Abbey Tax helpline via PCG last week and they tell me that I will not be eligible for ER as the balance in my account is too large.

Interesting. I wonder what their general policy on this kind of thing is (ie what amount is "too large").

Like I said in my previous post, claiming entrepreneurs relief isn't a new thing that's come about since 1 March 2012. The only new thing is that (if >£25k assets) you need the MVL to get CGT treatment rather than dividend.

I therefore think it's just as apt a question to say who since April 2008 (when entrepreneurs relief replaced taper relief) applied for ESC C16, what was the cash balance at the end, did you claim entrepreneurs relief, and did it get challenged.

...think I'll start a new thread for this, as whilst not many people will have successfully gone through the MVL process recently, I'm sure lots will have done the above.

[Greg@CapitalCity]

Hi did you get an answer from your accountant on this ? I was thinking the same thing if I go down the MVL route and then I find HMRC wont allow ER, are you just better off noting doing MVL and simply taking the cash out all as divs ?

Maybe correct. If you are a higher rate tax payer, then closing down via MVL without ER will mean you get the first £10,600 tax free, and pay 28% capital gains tax on the rest. If you go down the dividend route, then depending on your earnings those dividends will be taxed at 25% (higher rate tax rate) or 36% (additional rate tax rate). If your total gross earnings for the year exceeds £100k then you start to lose your personal allowance as well.

Put those variables into a spreadsheet, and you'll then get your answer.

[richy_rich]

I'm in a similar position - my accountant said it should be ok to claim ER but what happens if I pay 3.5k to MVL then apply for ER and get knocked back.

I'll then have to fork out a huge amount of tax on the 250k balance built up over the years as I'll have no other option than to take this out as a dividend.

I spoke to Abbey Tax helpline via PCG last week and they tell me that I will not be eligible for ER as the balance in my account is too large.

Think I'm gonna sit tight until it becomes a bit clearer as it seems to depend upon who you talk to.

RR.

[RockyBalboa]

Has anyone on here actually gone through MVL?

[Maslins]

Hi did you get an answer from your accountant on this ? I was thinking the same thing if I go down the MVL route and then I find HMRC wont allow ER, are you just better off noting doing MVL and simply taking the cash out all as divs ?

Sadly as with a lot of tax law there's sufficient ambiguity that until there's decent case law on the subject we're left with some uncertainty.

Having said that, back when ESC C16 was in place nobody seemed to question the availability of entrepreneurs relief, and I'm not aware of any cases where HMRC said yes you can have CGT treatment via ESC C16, but you can't benefit from ER. All the MVL (members voluntary liquidation) does is get past the ESC C16 bit, I don't see why it would change anything re ER.

...so I personally feel people are worrying unnecessarily about this. Even looking at HMRC's trading vs investment tests nearly every contractor co will pass 2 of the 3 tests, so whilst most will fail the third the majority still point towards trading.

[ELBBUBKUNPS]

If I apply for MVL and don't get ER then it appears I would get taxed 28% flat rate does corp tax paid also get excluded from this i.e so paying 18% at my tax return.
If not then it doesn't make sense it appears I may be better off going down dividends route right ?

Hi did you get an answer from your accountant on this ? I was thinking the same thing if I go down the MVL route and then I find HMRC wont allow ER, are you just better off noting doing MVL and simply taking the cash out all as divs ?

[biggie]

thanks for all your replies.

I don't want to go down pension route as I need the hard cash over the next year or so and retirement is many years away..

MVL appears to be best route so will ask my account for further advice.

I believe even if I don't get the concession it's still the most take efficient.

thanks

If I apply for MVL and don't get ER then it appears I would get taxed 28% flat rate does corp tax paid also get excluded from this i.e so paying 18% at my tax return.
If not then it doesn't make sense it appears I may be better off going down dividends route right ?

[Maslins]

What is an MVL?

Sorry, Members Voluntary Liquidation...ie a liquidation where the shareholders choose to do it, rather than creditors insisting on it.

[Old Hack]

Double check with your accountant, but in the vast majority of cases if you want to close down your company and it has >£25k in the bank, an MVL will be the way to get the most out of the company. A fee of a grand or two is negligible compared to the tax savings available to most.

What is an MVL?

Has the OP not considered piling in £100k into a pension? (50k this and 50k last year), then take 10.6k, then do the rest as divis?

[Maslins]

Perhaps relevant, one thing I came across recently was this page from the HMRC site.

It's about transactions in securities & liquidations, but the bit I felt relevant here is the example, which talks about the client having "£1m cash representing its undistributed profits". The example then carries on, and the company owner has effectively transfered the trade of the business, just leaving the cash, then liquidating the cash shell.

My point is, there's no mention that having £1m in undistributed profits in itself is a risk to obtaining entrepreneur's relief...so suggesting £200k would be very unlikely to be challenged.

I do think contractors need to be a little careful surrounding the transfer in securities rules if they'll be setting up a new company to carry on contracting through. I'd recommend timing the liquidation so things like the first client you work for in Newco is different to last client in Oldco, use it as an excuse to get a new laptop/phone deal (so no transfer of company equipment), and get a different enough company name so you can't be accused of transferring the brand.

[Maslins]

Double check with your accountant, but in the vast majority of cases if you want to close down your company and it has >£25k in the bank, an MVL will be the way to get the most out of the company. A fee of a grand or two is negligible compared to the tax savings available to most.

[ASB]

Hi centurian, I think you're assuming the salary from the new position would be taxed after the dividend payout? Dividends are taxed last, so its most likely some of the OP's new permanent salary will be taxed at 20%, and the rest at 40%.

Another consideration might be that if the dividends are "leaked out" over time then the OP may be able to capitalise on this over a few years by filling the most appropriate tax band (i.e. avoiding any 50% tax).

This would probably give a better overall yield than liquidation if ER is not available, and could potentially (but unlikely) give a better yield even if ER was obtained.

Further considerations might be depending upon the OP's age, how long they might want to tie the money up, and their immediate financial requirements to consider company pension contributions, perhaps carrying forward unused contributions. Since this is an expense and would likely lead to a tax loss in the year the contribution was made, then assuming relief were still obtainable this should also lead to a CT rebate and the funds could be placed in a cash type pension (depending upon OPs risk profile) and 25% taken immediately in the OP is 55. Just yet more considerations to throw into the mix.

[rehanahmed]

HI Biggie

Your calculations do look right.

Closing the company through an MVL will definitely save you a substantial amount of Tax - it is something that we are doing for a number of clients now.

You will need to make sure that your accountant mentions this when he submits your Self assessment for this year in January 2014.

It is then when your £16,000 bill will be due.

Prior to this you will need to make sure all the companies debts have been verified and if necessary paid off aswell otherwise they will be paid through the £160K sitting in the account.

Your accountant will also need to submit final returns to companies house and HMRC when you decide to close up.

The procedure is relatively straight forward. If you havent already got an insolvency practice to deal with this, do send me a message and we can discuss how we can assist in placing the company into an MVL.

Thanks

Ray

Mod note: Hi Ray, if you represent a company, admin can change your login to [email protected].

[Greg@CapitalCity]

....then every penny of those earnings will be taxed at 50%.

Hi centurian, I think you're assuming the salary from the new position would be taxed after the dividend payout? Dividends are taxed last, so its most likely some of the OP's new permanent salary will be taxed at 20%, and the rest at 40%.

[centurian]

Greg - you haven't brought up the 50% tax rate and the potential that the OP would not qualify for ER!

Not to mention that if the OP receives any other earnings for the rest of the year (going permie etc.), then every penny of those earnings will be taxed at 50%.

And of course, remember that if you go over 100K (which the OP definately will), you hit the 60% marginal tax band as well due to the loss of the personal allowance.

Liquidation is definately the way to go - even if you can't claim ER, at least you can prevent burning up the allowances in the various tax bands.