Reply to: Dividend withdrawal strategy on closing limited company

[northernladuk]

That's my view too...though if permie job is coincidentally with last client of Oldco, who also happened to be first client of Newco, it would all start to look a bit more suspicious!

Well if that was the case he has IR35 and a whole host of other issues to worry about not just pheonixing... Would be bloody stupid to try follow that model.

[intalex]

Agreed, although I'm not sure a client would generally agree to someone operating as a contractor, then permie, then contractor again. There are potential tax risks for the client as well.

I think contract -> permie is probably the most common route as there are some benefits (mainly intangible) for both parties to do so.

Thanks everyone for sharing their views - hopefully Craig's well explained strategy above will make it easy for others to know their options when considering winding up their company.

[Maslins]

But the fact the OP is taking a permie job inbetween is clear evidence they are not phoenixing or trying to use the system to gain tax advantage. It is unfortunate that they shut the business down in good faith and how ever long later the plan didn't work and they have to start a new business. Completely unrelated events with proof. Surely that is enough evidence?

We haven't mentioned timescales here but I would hope the OP can stay perm at least a couple of months and then a notice period so there would be at the very least a 6 month gap between the two companies.

That's my view too...though if permie job is coincidentally with last client of Oldco, who also happened to be first client of Newco, it would all start to look a bit more suspicious!

[northernladuk]

But the fact the OP is taking a permie job inbetween is clear evidence they are not phoenixing or trying to use the system to gain tax advantage. It is unfortunate that they shut the business down in good faith and how ever long later the plan didn't work and they have to start a new business. Completely unrelated events with proof. Surely that is enough evidence?

We haven't mentioned timescales here but I would hope the OP can stay perm at least a couple of months and then a notice period so there would be at the very least a 6 month gap between the two companies.

[Maslins]

Until this is tested in the courts, we won’t have any definitive answer to this...but for the sake of debate and ensuring that anyone reading this thread is getting a good range of opinions: the trade of the company has nothing to do with it’s name, branding or indeed it’s assets, surely it is to do with the activities that the company engages in?

For example, I’m an accountant, it’s what I’m trained in, qualified in and it’s what I do for a living – essentially it’s my trade. I could change my name, change my appearance and change the calculator that I work with and I’d still be an accountant! I could even go travelling, work in a bar for a year, come back and work for a completely different accountancy practice in a different town and I’d still be an accountant, it would still be my trade!

As I say though, we don't know how HMRC would interpret this sort of thing until they actually tried it with somebody, nor do we know whether they would even try to apply it to the likes of a contractor service company...

Craig

Yes it's all speculation like you suggest, and probably going very off topic, but...

Take goodwill, it's a concept that when you buy an existing business, you're buying more than just the office/computer etc. You're buying the branding, the loyal client base etc etc. IMO those are therefore a key part of the trade. My point is to minimise the number of common traits between your new business to your old business.

If you left Nixon Williams to set up "Craig's Contractor Accounting", yes, you'd still be doing accountancy work, but that doesn't make it a continuation of the same business...if it did, Maslins, Baker Tilly, and Tenon would all be one and the same business...

[Craig at Nixon Williams]

Got a similar(ish) conversation going on in two threads.

See here for some HMRC blurb re transactions in securities and liquidations.

In the scenario they give, Newco is set up before Oldco is closed down. Trade (but not cash) of Oldco is transferred to Newco. Oldco then liquidated, leaving shareholder with all the cash at CGT rates, and essentially the same business continuing to trade under Newco.

I guess it could be argued if someone stopped contracting, closed down Oldco, then started Newco a few weeks later that they'd in effect done the same thing...hence why I'd recommend being a little prudent, avoiding using the same company name/branding, ensure first contract with Newco is with different client to last contract with Oldco, new laptop etc. If you do all that, there's very little linking the trade of Newco to Oldco, so I don't see much risk.

Assuming there's a bit of permie work in between, I think it's safe that there's a clear cessation of old business, a break, then new business started, hence I'd say safe.

Until this is tested in the courts, we won’t have any definitive answer to this...but for the sake of debate and ensuring that anyone reading this thread is getting a good range of opinions: the trade of the company has nothing to do with it’s name, branding or indeed it’s assets, surely it is to do with the activities that the company engages in?

For example, I’m an accountant, it’s what I’m trained in, qualified in and it’s what I do for a living – essentially it’s my trade. I could change my name, change my appearance and change the calculator that I work with and I’d still be an accountant! I could even go travelling, work in a bar for a year, come back and work for a completely different accountancy practice in a different town and I’d still be an accountant, it would still be my trade!

As I say though, we don't know how HMRC would interpret this sort of thing until they actually tried it with somebody, nor do we know whether they would even try to apply it to the likes of a contractor service company...

Craig

[Maslins]

Put simply, the Transactions in Securities legislation is designed to stop you from closing down a cash rich company and taking advantage of the favourable tax rates applicable to capital gains and then starting a new company the following week continuing doing the same thing.

Got a similar(ish) conversation going on in two threads.

See here for some HMRC blurb re transactions in securities and liquidations.

In the scenario they give, Newco is set up before Oldco is closed down. Trade (but not cash) of Oldco is transferred to Newco. Oldco then liquidated, leaving shareholder with all the cash at CGT rates, and essentially the same business continuing to trade under Newco.

I guess it could be argued if someone stopped contracting, closed down Oldco, then started Newco a few weeks later that they'd in effect done the same thing...hence why I'd recommend being a little prudent, avoiding using the same company name/branding, ensure first contract with Newco is with different client to last contract with Oldco, new laptop etc. If you do all that, there's very little linking the trade of Newco to Oldco, so I don't see much risk.

Assuming there's a bit of permie work in between, I think it's safe that there's a clear cessation of old business, a break, then new business started, hence I'd say safe.

[Craig at Nixon Williams]

am afraid I have no idea what you said above, can you do a for dummy explanation?

e.g. lets assume one has x amount in the company's account when closing down, I understood from a previous post that one can do:
1- Div distribution
2- Capital Distribution
3- Remaining balance

For the above: what are the limits that would not have any tax liability and timeline I need to do by?



Will do, thanks.

Put simply, the Transactions in Securities legislation is designed to stop you from closing down a cash rich company and taking advantage of the favourable tax rates applicable to capital gains and then starting a new company the following week continuing doing the same thing.

For example: assume that you are a higher rate tax payer and so pay 25% on dividends and are eligible to entrepreneurs relief.

If you take a £25,000 dividend you would pay £6,250 in tax (25% of £25k).

If you close the company and take £25,000 as capital you would pay £1,440 (£10,600 tax free and then £14,400 at 10%).

If you then continue in the same trade the following week but through a seperate company then clearly the motive for closing the original company is tax avoidance! Transactions in Security exists to try and stop this.

If you are closing the company and aren't going to trade in the future then there is nothing to stop you from taking funds in the same manner as I have described to intalex!

Hope this helps!
Craig

[SandyD]

Closing the company wouldn't make a HMRC enquiry impossible (they can technically open one for 6 years) but it does make it a fair bit harder for them as they would need to apply for the company to be restored etc. That wouldn't stop them looking at personal tax though!

Thanks that's what I thought, also was told its good to keep the company open as its better to trade with a company with a solid good history instead of opening a brand new one, but will talk to accountant and see what he advises.


[/QUOTE]

If the company is closed down and you might start contracting again then it would be prudent to take the whole of the final distribution as a dividend so that no tax advantage is gained from capital treatment. This is because of the existence of transactions in securities rules which is essentially anti-avoidance legislation existing to stop you benefiting from such arrangements. These have never been tested in this context (as far as I am aware) so can’t really comment on exactly how (or if) HMRC would attempt to challenge it, but as it exists it should be considered.

am afraid I have no idea what you said above, can you do a for dummy explanation?

e.g. lets assume one has x amount in the company's account when closing down, I understood from a previous post that one can do:
1- Div distribution
2- Capital Distribution
3- Remaining balance

For the above: what are the limits that would not have any tax liability and timeline I need to do by?

With regard to the situation with the accountant, speak to them and see what they can do for you!

Craig

Will do, thanks.

[intalex]

Thanks Craig - that's much easier to read than how I explained it.

And yes indeed it is 90%, not 80%.

[Craig at Nixon Williams]

Just to summarise my revised understanding of the appropriate "surplus cash" withdrawal strategy on closing the company (non-liquidate route):-

Plan 2 payments as follows, splitting each into 2 pots:-

Dividend Payment: Paid before ceasing trading
1.1 Net dividend to take total gross earnings to higher rate tax: (£42,475 less Gross Salary) x 80%
1.2 Net dividend to be taxable at higher rate tax of 25%: Remaining cash surplus

Capital Distribution Payment: Paid after ceasing trading, clearing debtors/creditors (except maybe CT) and producing final accounts, but before applying to strike off company
2.1 Capital distribution up to the CGT tax-free allowance: £10,600
2.2 Capital distribution up to the limit for £25k Entrepreneur's Relief: £14,400

Once final surplus cash position is known after clearing all debtors, creditors and allowing for corporation tax, fill up (as a plan) each of 4 pots in the following order of priority and make the payments (to self) as described above:-

1.1 (£42,475 less Gross Salary) x 80% - no additional tax payable
2.1 £10,600 - no additional tax payable
2.2 £14,400 - taxable @ 10%
1.2 Remaining balance - taxable @ 25%

Hopefully this incorporates the responses and comments on my first post, but if I've missed or misunderstood something, please let me know.

Just to clarify here – when closing the company (assuming that you are not going to formally liquidate) you would make two distributions:

Firstly a dividend distribution to deplete the company’s reserves down to £25,000 – this would be taxed in the same way as any other dividend, there would be no additional tax on any part of it falling into the basic rate band and 25% would be due on the net dividend falling into the higher rate.

The second distribution (£25,000) would be a capital distribution – assuming that you have no other gains or losses in the year and qualify for entrepreneurs relief then the fist £10,600 would be tax free and the remaining £14,400 would be taxed at 10%.

One final thing – when calculating how much dividend you can have in the basic rate threshold, you should multiply it by 90% instead of 80% (assuming your calculation is to remove the tax credit which is 10%).

Hope this helps!
Craig

[intalex]

Just to summarise my revised understanding of the appropriate "surplus cash" withdrawal strategy on closing the company (non-liquidate route):-

Plan 2 payments as follows, splitting each into 2 pots:-

Dividend Payment: Paid before ceasing trading
1.1 Net dividend to take total gross earnings to higher rate tax: (£42,475 less Gross Salary) x 80%
1.2 Net dividend to be taxable at higher rate tax of 25%: Remaining cash surplus

Capital Distribution Payment: Paid after ceasing trading, clearing debtors/creditors (except maybe CT) and producing final accounts, but before applying to strike off company
2.1 Capital distribution up to the CGT tax-free allowance: £10,600
2.2 Capital distribution up to the limit for £25k Entrepreneur's Relief: £14,400

Once final surplus cash position is known after clearing all debtors, creditors and allowing for corporation tax, fill up (as a plan) each of 4 pots in the following order of priority and make the payments (to self) as described above:-

1.1 (£42,475 less Gross Salary) x 80% - no additional tax payable
2.1 £10,600 - no additional tax payable
2.2 £14,400 - taxable @ 10%
1.2 Remaining balance - taxable @ 25%

Hopefully this incorporates the responses and comments on my first post, but if I've missed or misunderstood something, please let me know.

[Nixon Williams]

Can you not keep the company dormant for a couple of years and just withdraw slowly, I know it means more personal tax as you will be in full time employment as well, but it unless you need the capital all at one go, it maybe the best option?

This can be a viable option but this is also why this matter should be discussed with your accountant.

Making plans for the future based on tax rules and rates that exist now, can have its risks.

As an example the rules recently changed on the capital treatment upon winding up, it is not impossible that the rules on the taxation of dividends could change before you have managed to extract all the retained funds.

There is no right or wrong way, just a series of choices, provided that your accountant has made you aware of the various choices and any risks attached, you can make an informed decision.

Alan

[SandyD]

Can you not keep the company dormant for a couple of years and just withdraw slowly, I know it means more personal tax as you will be in full time employment as well, but it unless you need the capital all at one go, it maybe the best option?

[Waldorf]

You will find you will have to deal with the liquidator direct regardless for the majority of the process.

But why would this make you wary of using a liquidator recommended by your accountant?