Reply to: Closing Ltd Co. ---> Umbrella 12 Months ---> Opening Ltd Co.

[Zero Liability]

Think you're talking about the time to object before a company's struck off. In cases where HMRC believe they were given false information/not given sufficient information, they do have the power to revive the company after the strike off (or liquidation) has been completed. This is where I think they have 1 year for a liquidated company and 6 years for a struck off company to potentially challenge it.

The above is very unlikely in any but the dodgiest of cases. As part of MVL Online's liquidation process we write to 3 separate addresses re taxes to seek clearance (ie check HMRC are happy with the company's tax affairs before we close). This is for the benefit of both us and the client. However, even with this, it's a case of HMRC being happy based upon the information they have. There's always a (very tiny) risk HMRC decide that whilst perhaps they had all returns and all liabilities were settled, they'd perhaps later decide they weren't happy with one/some of the numbers in one/some of the returns and challenge it. If this involved them having to reinstate the company, again, they'd only do this in fairly extreme cases of fraud, as it'd be a lot of hassle for them as well as the client/us.

The above could in theory be down to IR35...but some of the fears potential clients have had that a company going into liquidation would immediately trigger an IR35 enquiry on the grounds if they don't do it now it'll be lost forever don't seem to have materialised. If this were to happen, we would know about it. However, if someone's personal tax return got enquired into after it was submitted (and hence easily a year after the liquidation was finalised) we probably wouldn't know about it.

Thanks for the information. This is what I had in mind, however I wasn't aware of the 1 year limit they had post-closure with regard to the company's affairs. I thought it extended farther back than that.

[Jessica@WhiteFieldTax]

I was wondering how all the "tax rebates R us" type folk get on with this. There seems to be a bunch of companies who reclaim travel, clothing etc for a fee and a cut.

Is it generally the case that this is for non self assessment cases and therefore easier?

Same rules whether self assessment of not. Going back beyond three years from previous year is not possible without going through HMRC "Special Relief" which is tortuous.

A lot of the "tax rebates R us" operators are less than scrupulous. One local to me, ex HMRC inspector, set up by himself, targeted maritime / oil rig workers AFAIR, is now doing time. Locally, most of us in the know saw it coming. Alas money and ethics don't always mix.

[Maslins]

I thought it was 3 - 4 months they had to object to a company being struck off if there were any concerns and then it is closed if they fail to note any (leaving aside issues of restoring companies in incidents of fraud and the like), or is this with respect to IR35?

Think you're talking about the time to object before a company's struck off. In cases where HMRC believe they were given false information/not given sufficient information, they do have the power to revive the company after the strike off (or liquidation) has been completed. This is where I think they have 1 year for a liquidated company and 6 years for a struck off company to potentially challenge it.

The above is very unlikely in any but the dodgiest of cases. As part of MVL Online's liquidation process we write to 3 separate addresses re taxes to seek clearance (ie check HMRC are happy with the company's tax affairs before we close). This is for the benefit of both us and the client. However, even with this, it's a case of HMRC being happy based upon the information they have. There's always a (very tiny) risk HMRC decide that whilst perhaps they had all returns and all liabilities were settled, they'd perhaps later decide they weren't happy with one/some of the numbers in one/some of the returns and challenge it. If this involved them having to reinstate the company, again, they'd only do this in fairly extreme cases of fraud, as it'd be a lot of hassle for them as well as the client/us.

The above could in theory be down to IR35...but some of the fears potential clients have had that a company going into liquidation would immediately trigger an IR35 enquiry on the grounds if they don't do it now it'll be lost forever don't seem to have materialised. If this were to happen, we would know about it. However, if someone's personal tax return got enquired into after it was submitted (and hence easily a year after the liquidation was finalised) we probably wouldn't know about it.

[Zero Liability]

Re 6 years, I think HMRC only have 12 months after dissolution to challenge anything on the company side of things...

I thought it was 3 - 4 months they had to object to a company being struck off if there were any concerns and then it is closed if they fail to note any (leaving aside issues of restoring companies in incidents of fraud and the like), or is this with respect to IR35?

[northernladuk]

I was wondering how all the "tax rebates R us" type folk get on with this. There seems to be a bunch of companies who reclaim travel, clothing etc for a fee and a cut.

Is it generally the case that this is for non self assessment cases and therefore easier?

Teachers get targeted by a company every few years. My other half and her friends used them and all got money back. Was a bit of a rip off as all they did was reclaim professional fees and some other pretty standard stuff due to them not doing SA but was easy enough so many of them were more than happy with it.

[ASB]

Mind you, getting HMRC to exercise discretion to open a closed year where discovery comes to light in the taxpayers favour is a thankless task

I was wondering how all the "tax rebates R us" type folk get on with this. There seems to be a bunch of companies who reclaim travel, clothing etc for a fee and a cut.

Is it generally the case that this is for non self assessment cases and therefore easier?

[Jessica@WhiteFieldTax]

Re 6 years, I think HMRC only have 12 months after dissolution to challenge anything on the company side of things...but yes, what this thread is talking about is largely the personal tax side of things (capital gains/entrepreneurs relief). Therefore with a possible discovery assessment (eg they "discovered" that you started contracting again a few months later) I imagine they could legally challenge a personal tax return 6 years later.

This is a good point - HMRC are having repeated success at tribunal and appeal in pushing the boundaries of discovery back, making the certainty we thought we all had with the self assessment regime and the concept of an "enquiry window" much less so.

Hopefully, over the next few years, the pendulum will swing back in the taxpayers favour.

"Interesting" times.

Mind you, getting HMRC to exercise discretion to open a closed year where discovery comes to light in the taxpayers favour is a thankless task; I instructed tax consul on a case like that last year, and we had to give up on cost/benefit grounds even though £10,000 was at stake The perils of people having a six yearly catch up for doing their tax returns...

[MrContractor85]

Thanks to everyone who responded. Did try to give thanks/likes for most of the posts but couldn't see the option...maybe it's only a veteran poster privilege!

I think what Craig and Clare said probably makes the most sense. There is a risk and the tax savings are probably negligible vs continuing contracting under the same company in that year. Also, the contract could roll past a year at which point I'd have to get the client to reissue a contract facing my new ltd company but it would essentially be the same role....

Also thanks to cycling programmer and Kanye (west?) for their viewpoints. And lastly Maslins...very good point about trying to get a mortgage and only being able to show past accounts as opposed to an actively trading company. Sure, the umbrella company should have the guise of permanent employment to a mortgage broker but if my company is still ticking over when I discuss my options then that's definitely a better choice..

Once again thanks for all the replies, really appreciate it!

[Maslins]

Out of curiosity (and if you are able to say), what is the largest cash liquidation you have completed? And was another Ltd company created by the contractor immediately after?

If the 50k liquidation is challenged by HMRC then yes the additional tax due is less than 10k, and for a £1m cash liquidation it's more like £200k.

It's interesting to note that HMRC have 6 years to challenge any liquidation that has a phoenix aspect to it.

We've (we being MVL Online) had 3 cases to date that have been in the £500k-1m range. None above £1m (yet). Quite a few that are £250k-500k. The vast majority are either £50k-100k or £100k-250k.

Then there are the smaller ones at £25k-50k. Aren't all that many of these, presumably because if you've got (say) £30k net assets, you'll likely "find" a way to reduce the net assets to below £25k to avoid the cost/hassle of a liquidation...possibly a pension contribution, or a final dividend planned in as a final part of trading rather than as part of the close down.

It's not really any of MVL Online's business what the individual does after (or during) our involvement. We do know a few who have gone on to contract again. Whether there was a commercial (non tax) reason for the close down then re-start we don't know. Even if it was tax motivated, I still think the onus is on HMRC to prove you're continuing the same trade...which I can't imagine they'd do easily when there are negligible links (eg assets/clients/branding) between Oldco and Newco.

Re 6 years, I think HMRC only have 12 months after dissolution to challenge anything on the company side of things...but yes, what this thread is talking about is largely the personal tax side of things (capital gains/entrepreneurs relief). Therefore with a possible discovery assessment (eg they "discovered" that you started contracting again a few months later) I imagine they could legally challenge a personal tax return 6 years later.

[ChimpMaster]

I'd agree with most of the above (yes some regular readers may understandably suggest I'm biased towards MVLs).

The TIS rules are amongst other things about transferring the trade and assets (except cash) from Oldco to Newco, then liquidating Oldco. See HMRC's example here. I personally feel HMRC would have a very hard time arguing there was continuation of the same trade when there's a 12 month break. Plus, ignoring the actual rules, HMRC's example is a £1m cash company. From the perspective of closures, £50k is relatively small fry, so you're unlikely to come under particularly close scrutiny from HMRC.

<snip>.

Out of curiosity (and if you are able to say), what is the largest cash liquidation you have completed? And was another Ltd company created by the contractor immediately after?

If the 50k liquidation is challenged by HMRC then yes the additional tax due is less than 10k, and for a £1m cash liquidation it's more like £200k.

It's interesting to note that HMRC have 6 years to challenge any liquidation that has a phoenix aspect to it.

[TheCyclingProgrammer]

One last important point I feel: you can deduct MVL costs and additional tax paid by taking the umbrella route when calculating your "net" tax saving but if HMRC did pursue counteraction, they won't.

Their calculation will be as simple as: income tax due if paid as a dividend (up to the maximum possible distribution the company could have legally made) - CGT paid, so if they did try and get the extra tax, you would have ended up paying the extra tax you would have paid if you'd just taken a dividend at the higher rate PLUS the liquidation costs and the extra tax you've been paying through your umbrella arrangement.

[Maslins]

As others have said, it's all speculation as I'm not sure there is much case law or evidence of HMRC applying TIS in hese circumstances so you should expect caution from some accountants.

Clare may have made the most salient point though, that the savings made in tax, after deducting MVL costs, may be reduced to only a few grand by the extra tax and NI incurred through using the umbrella, even more so if you have some basic tax allowance left.

I'd agree with most of the above (yes some regular readers may understandably suggest I'm biased towards MVLs).

The TIS rules are amongst other things about transferring the trade and assets (except cash) from Oldco to Newco, then liquidating Oldco. See HMRC's example here. I personally feel HMRC would have a very hard time arguing there was continuation of the same trade when there's a 12 month break. Plus, ignoring the actual rules, HMRC's example is a £1m cash company. From the perspective of closures, £50k is relatively small fry, so you're unlikely to come under particularly close scrutiny from HMRC.

But, as Clare suggests, you need to weigh up the benefits. The potential tax saving is ~£8.5k (Clare's calc plus allowing a £10k annual exemption), deduct approx £2k for liquidator fees/disbursements/Newco start up costs. Saving = ~£6.5k. Deduct from that the additional tax/NICs you'll pay using an umbrella rather than Ltd Co for 12 months. Do consider a value for "hassle factor" as well. Simply continuing with the same company would be far easier.

Is that worth it for the possible risks? Depends on your day rate I'd suggest (and hence umbrella/Ltd differential) and attitude to risk/hassle.

Also perhaps worth discussing your plan with a mortgage advisor. Ignoring any tax impact, they might argue it's a bad idea on the grounds you've currently got a company with 3 year trading history, which should satisfy most lenders. If you drop that and go umbrella, a lender will possibly see that as a brand new job, hence a bit risky...but as with nearly all the above, this is again just speculation from me.

Another thing possibly worth considering is if it's just for deposit purposes, we're only a couple of months away from a new tax year. Therefore you can probably take out ~£30k in just over 2 months tax free. Caveat that of course you'd then be paying HRT on any further dividends that tax year, but if it's just the deposit where you're struggling, then living costs are low, this may work well.

[TheCyclingProgrammer]

I mentioned it in my previous post, it may well be possible to close one company down then use an umbrella for a year and then open a completely new (unrelated in any way) company and not be caught by the TIS rules. However, as far as I'm aware there hasn't been any case law on this exact situation so a lot of what we are saying is opinion/speculation.

Sure. My view is that if the reason for shutting down is to take on a permie job, then that's a very reasonable commercial reason and I'd be very surprised if HMRC pursued that.

I do also accept that the use of an umbrella as an artificial means of continuing contracting, even though it could technically be considered taking on employment, could be seen through and challenged by HMRC *if* they felt it was worth it (which they may not given the amounts involved).

Personally, I think this one would come down to your attitude to risk and how comfortable you are taking the chance that HMRC could try and apply the rules and seek some extra tax. I wouldn't advise a client to do as the OP has suggested and in my opinion the potential tax savings probably just aren't worth it. But I'm sure some contractor's would think it's a risk worth taking to saving to save some tax so I would happily discuss the pros/cons with a client if asked.

Martin
Contratax Ltd

As I said before, I think that whilst the discussion about whether TIS rules could apply is interesting, Clare made the most important point that the tax saving might not be enough to make the extra faff and risk worthwhile.

If the numbers were a lot bigger, then IMO it would be, at the very least, worth applying to HMRC for clearance if you feel you would not be caught.

[ContrataxLtd]

?

Just giving an alternative viewpoint on a scenario that has no definitive answer. I'd expect a good accountant to give me all the options as well as their opinion, and outline the pros/cons and potential risks. I wouldn't want to miss out on a potential tax saving just because my accountant is "uncomfortable" or not fully versed in he rules.

There is a very good article on the rules here:
http://www.taxation.co.uk/taxation/A...feeling-secure

I think the chances of OP being caught are low, but I'd also tell him to calculate what his overall tax advantage is so he has an idea of what he might owe if HMRC pursue counteraction.

I also don't see what harm there would be in actually ringing HMRC and asking for their opinion on whether closing a company to return to full time employment, then later starting a company would be caught. You could even apply for clearance if you like! At worst they say no or refuse clearance and you carry on as normal.

It's important to note that the main purpose of the transactions in securities has to be to gain a tax advantage for HMRC to pursue counteraction. The burden of proof for this is on HMRC. If there is a genuine commercial reason then you shouldn't be caught.

I mentioned it in my previous post, it may well be possible to close one company down then use an umbrella for a year and then open a completely new (unrelated in any way) company and not be caught by the TIS rules. However, as far as I'm aware there hasn't been any case law on this exact situation so a lot of what we are saying is opinion/speculation.

Personally, I think this one would come down to your attitude to risk and how comfortable you are taking the chance that HMRC could try and apply the rules and seek some extra tax. I wouldn't advise a client to do as the OP has suggested and in my opinion the potential tax savings probably just aren't worth it. But I'm sure some contractor's would think it's a risk worth taking to saving to save some tax so I would happily discuss the pros/cons with a client if asked.

Martin
Contratax Ltd

[Kanye]

Just take a slightly bigger mortgage and pay it off with a future dividend. An extra £20k on the mortgage at 4% will only cost £800 whereas that £20k could cost you £8k at higher rate tax.

Directors loans can also legally be used to spread dividends over multiple years.

I have used both of the above to buy and pay off 2 properties now in very tax efficient manner. All completely above board and no paperwork or umbrella companies at all.