Reply to: Closing down a Ltd company

[jamesbrown]

Would it not be worth sitting down with an accountant to go through the minute details of what each route would cost you. Bearing in mind you have £500K sitting in an account paying virtually nothing it may not be as black and white as it appears. Invested properly surely you can make much more than the cost of the tax to get it out compared to trickling it out over, I would guess nearly 6 years where it doesn't grow a penny?

Yeah, it seems to me that a voluntary liquidation would make a lot more sense, assuming there weren't major factors pointing towards an investment company. Either way, for these sums, I'd definitely be seeking professional advice on the minute details.

ps. Thanks to Maslins et al. for the very informative posts above.

[northernladuk]

Would it not be worth sitting down with an accountant to go through the minute details of what each route would cost you. Bearing in mind you have £500K sitting in an account paying virtually nothing it may not be as black and white as it appears. Invested properly surely you can make much more than the cost of the tax to get it out compared to trickling it out over, I would guess nearly 6 years where it doesn't grow a penny?

[ragman]

You can...I'd just question the logic. Assuming you want to spread it out over a lot of years to minimise personal tax, that's a lot of sets of statutory accounts, annual returns, probably corporation tax returns, possibly VAT/employer returns (ok these last ones you should fairly easily be able to get out of).

But technically, yes you can. The cash and retained profits figures will go down year after year until it's all gone.

Great. The idea is that I may take dividends (below the tax threshold, i.e. £30k) over time as a small income. This combined with the other director (my wife ) taking the same amount may be a good way to run down the funds without the taxman getting his/her hands on my hard earned cash.

[Maslins]

Does anyone know if you can still take dividends from a company that hasn't got an income and hence isn't really a trading company?

You can...I'd just question the logic. Assuming you want to spread it out over a lot of years to minimise personal tax, that's a lot of sets of statutory accounts, annual returns, probably corporation tax returns, possibly VAT/employer returns (ok these last ones you should fairly easily be able to get out of).

But technically, yes you can. The cash and retained profits figures will go down year after year until it's all gone.

[Craig at Nixon Williams]

Does anyone know if you can still take dividends from a company that hasn't got an income and hence isn't really a trading company?

Providing that there are profits in the company then you can take dividneds, irrespective of whether the company is generating income during the accounting period.

As the director of the company you are responsible for ensuring that there is sufficient retained profits to pay a dividend and that the company can met any obligations as they fall due. Make sure that you document any dividends properly and take the cash from the company at the same time as the dividend is voted to avoid complicating things for yourself.

You will also need to ensure that any dividends that you receive are declared to HMRC on your self-assessment return.

Craig

[northernladuk]

Bearing in mind a few people suggested I would guess that is a yes.

Time to get an accountant to discuss how this affects any other income you may have, any pitfalls and what to do next I think.

[ragman]

Wow. Thanks for all the advice/views. As you can see this was my first post and I am really impressed that everyone would take the time to respond.

I am inclined to take the safe path of taking the money out via salary/dividends over the next few years.

Does anyone know if you can still take dividends from a company that hasn't got an income and hence isn't really a trading company?

[Maslins]

"Factors to consider include:

•whether the earnings are retained for the present and future cash flow requirements of the trading activity.
•the nature of the underlying investments used as a lodgement for the funds, for instance if the funds are locked into long term investments or the investments themselves are high risk that may suggest that they are not available for the trading activity.
•the extent of the company’s (or group’s) activity in managing the investments.
•whether the funds have been ear-marked for a particular use in the trading activity."

(my bold) - I know a few people who have prepared board minutes about how the company was considering buying a commercial property to operate from, hence building up the cash reserve. Inevitably this plan was aborted and a liquidation chosen instead...

[Maslins]

What would be the consequences of HMRC labelling the Ltd an investment company? Would all the funds then be subject to dividend or salary taxation?

No, it'd still be CGT, but you wouldn't get entrepreneurs relief. So you'd still get ~£10k annual exemption, but then rather than 10% on the rest it'd be 18-28% CGT depending upon your other income levels.

So worst case scenario it'd be 3% more tax than on a dividend...but of course in that (probably unlikely) scenario you'd have paid a liquidator a coupla grand for the privilege of paying the extra 3% tax, so you wouldn't be best pleased.

[Craig at Nixon Williams]

I have never heard of this going to court either - but the fact that these rules exist means that it should definitely be considered when making a decison. There isn't much guidance around on this either, but I'll put a couple of bits from HMRC on here for anybody that is interested...

The long term retention of significant earnings generated from trading activities may amount to an investment activity. The first point to consider is whether or not there is any identifiable activity distinct from the trading activity.

Factors to consider include:

•whether the earnings are retained for the present and future cash flow requirements of the trading activity.
•the nature of the underlying investments used as a lodgement for the funds, for instance if the funds are locked into long term investments or the investments themselves are high risk that may suggest that they are not available for the trading activity.
•the extent of the company’s (or group’s) activity in managing the investments.
•whether the funds have been ear-marked for a particular use in the trading activity.

Taken from: CG64060 - Entrepreneurs? Relief: trading company and holding company of a trading group - meaning of "in the course of, or for the purposes of, a trade"

and...

Most companies and groups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities "... do not include to a substantial extent activities other than trading activities". The phrase "substantial extent" is used in various parts of the TCGA92 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. Substantial in this context means more than 20%.

Taken from: CG64090 - Entrepreneurs? Relief: trading company and holding company of a trading group - the meaning of "substantial"

Hope you find this useful!

Craig

[ChimpMaster]

Good question and nobody really knows. As far as I'm aware there hasn't been a case that's gone to court on this to help provide boundaries.

If HMRC did challenge it, it would be the personal tax return they'd challenge, saying you didn't qualify for entrepreneurs relief as the company had become an investment one. Whether that would stand up in court I have no idea.

Worth stressing that this isn't a new thing post ESC C16, all the old ESC C16 cases since entrepreneurs relief has been in play will have had the same possible bone of contention. I personally don't think HMRC are likely to take this point (when the company had made all the money from what was clearly trading like you suggest)...but that's just my opinion, until it goes to a court and a judge gives their opinion (which would then be binding) nobody knows.

What would be the consequences of HMRC labelling the Ltd an investment company? Would all the funds then be subject to dividend or salary taxation?

[Maslins]

What are the chances of HMRC arguing that successfully if the OP has continued to trade and the majority of income has come from trade rather than investments? It seems to me that retaining money in the company is a perfectly reasonable pension strategy. To whom do HMRC argue this in the event of disagreement, i.e. who arbitrates?

Good question and nobody really knows. As far as I'm aware there hasn't been a case that's gone to court on this to help provide boundaries.

If HMRC did challenge it, it would be the personal tax return they'd challenge, saying you didn't qualify for entrepreneurs relief as the company had become an investment one. Whether that would stand up in court I have no idea.

Worth stressing that this isn't a new thing post ESC C16, all the old ESC C16 cases since entrepreneurs relief has been in play will have had the same possible bone of contention. I personally don't think HMRC are likely to take this point (when the company had made all the money from what was clearly trading like you suggest)...but that's just my opinion, until it goes to a court and a judge gives their opinion (which would then be binding) nobody knows.

[quackhandle]

I have to ask, what the feck did you live on?

qh

[jamesbrown]

you may have trouble in satifying the third criteria because you seem to be holding far more cash than the average working capital requirement of an independant consultancy business, if HMRC were to deem this to have been retained for investment purposes then they could attempt to argue that the company is not a true trading company.

What are the chances of HMRC arguing that successfully if the OP has continued to trade and the majority of income has come from trade rather than investments? It seems to me that retaining money in the company is a perfectly reasonable pension strategy. To whom do HMRC argue this in the event of disagreement, i.e. who arbitrates?

[Craig at Nixon Williams]

I have been an independent contractor for some time now and taken very little from the company in either wages or Dividends.
As a result I have circa £500k of cash in the company. I was orignally planning to close the company and retire using the 10% CGT option but I understand that has now gone as a option.
I am trying to work out the most efficient way to to extract this from the company. I don't need to take the money all in one lump (i.e. I could take out £50k a year).
The company has only 2 directors. Each has savings so no need for a specific income.
Any suggestions?
Can I just take dividends over the next few years even if the company isnt trading? I can keep the company going with a small income. Will that help?
Any advice welcome.

Although ESC C16 doesn't exist any more (it was replaced about a year ago by a statutory instrument), you can still have funds from a company in liquidation treated as capital under two circumstances:
1. The funds are under £25k (clearly not applicable in this example); or
2. You appoint a liquidator to wind up the company (known as an MVL).

If the gain made on disposal of the company qualifys for Entrepreneus Relief then it will be taxed at 10% (assuming that you have not have lifetime gains in excess of £10m).

In order to qualify the following must have applied for a minimum period of 12 months immediately prior to disposal:
1. You must be an officer or employee of the company.
2. You must have at least 5% of the issued share capital of the company with at least 5% of the voting rights.
3. The company must be a trading company (as opposed to being classed as a closed investment holding company).

With such a large amount of cash on your balance sheet, you may have trouble in satifying the third criteria because you seem to be holding far more cash than the average working capital requirement of an independant consultancy business, if HMRC were to deem this to have been retained for investment purposes then they could attempt to argue that the company is not a true trading company.

You make a good point about drawing an income from the company over a sustained period of time - you could take annual dividends from the company up to the higher rate threshold for each shareholder (currently £42,475 gross), and if you have no other form of income this would be free of additional tax. This would be suitable if you are retiring and so do not expect to have an income in the future - if the dividends that you take from the company do go into the higher rate tax band then they will be taxed at 25% effectively.

Hope this helps!

Craig