Reply to: Ltd to umbrella - ER implications?

[WordIsBond]

On the face of it, if it’s legitimate to give a spouse shares in a company a la Arctic Systems, there’s at least an argument to be made that the gift is legitimate regardless of whether I retain any shares or not myself.

This was my thought, too. And I also thought that if it 'smells off' as you acknowledged (and I also detected an odour when you mentioned it), then someone could come along 3-4 years from now, change the law, and say this was 'aggressive avoidance,' 'outside the spirit and intent of the law,' and give you a lot of grief. We've crossed some pretty unpleasant thresholds recently.

So even though I think it might actually pass the 'is this currently legal' test, I don't think I'd want to do something that doesn't pass the smell test. FWIW, IMO only, IANAA, IANAL, take advice, do your own risk/reward assessment, etc, etc.

[Amanensia]

Thanks for your response - negative response is at least as valuable as positive; I don’t want “confirmation bias” answers, I want to get at the truth, or as close to it as we can. I don’t think it’s unreasonable for me to approach sources that are more knowledgeable than myself - which would include my own accountant, a friend who happens to be a tax partner in a major firm, and your good selves on this forum!

On the face of it, if it’s legitimate to give a spouse shares in a company a la Arctic Systems, there’s at least an argument to be made that the gift is legitimate regardless of whether I retain any shares or not myself. As I acknowledged in my post it does “smell” a bit off, but I can’t immediately see what it falls foul of. I’ll speak to my accountant but I have a couple of other queries with them now and as it’s not hugely pressing it can wait a bit.

[webberg]

A friend, who is a corporate tax guy at a medium-sized UK accounting practice, suggested .

Blatant avoidance of the type the anti avoidance legislation in this area specifically targets.

You have an accountant you pay but you are prepared to consider a random suggestion from the man (or a friend) from the pub. Really?

[Amanensia]

Agreed, probably not the brightest thing I've ever done!

A friend, who is a corporate tax guy at a medium-sized UK accounting practice, suggested I might look into avoiding the MVL route, and instead give my shares to my wife (we are currently 50:50 shareholders) and then resign as a director and employee. She could then pay herself £50k/year in dividends. She has no other income. While this would be marginally better in terms of tax (7.5% dividend tax vs 10% CGT/ER) that's not enough of a reason for me to go down this route - however the fact that this wouldn't be a liquidation presumably means I would no longer have to worry about the phoenixing thing at all, and indeed could set up another company immediately if I wished to do so.

This smells a little bit to me so I wouldn't seriously consider the approach unless I had proper paid-for advice that it was legitimate. I'll ping it to my accountant at some point but I want to give them a chance to reply to my previous questions first so it might be a week or two! In the meantime, any opinions on here? We're married and cohabiting (so spousal exceptions should apply if relevant) and all shares are ordinary, pari passu.

[WordIsBond]

I'd get on the phone to MVL Online today, tell them about the notice account. The process takes a while anyway, so you may not need the funds to clear before a lot of stuff can be done.

Probably not the brightest thing you've ever done to lock up those funds with this IR35 thing coming along. There was always a risk you'd be needing to go brollie or perm and would want to close the company. Obviously you can't change it now but I thought it was worth 'making a thing' of it in case anyone else is reading and thinking about locking up funds for 3-6 months. Not a good plan if this kind of thing might be in their future. I don't know that anyone writing here has thought of mentioning that, though -- maybe cojak should add something to that sticky about the possible benefits of closing your company, including that you don't want to lock up your funds if you might end up wanting to go that way.

[Amanensia]

Yes, I'll go with Maslins - MVLOnline I believe? Unfortunately it'll take a while as a sizeable amount of funds are tied up in a four month notice account with no early withdrawal option.

[WordIsBond]

I am wondering how comfortable people would feel relying on this as evidence of HMRC's intentions.

It's been discussed a lot here, and that document has been linked here before.

The real question, of course, is how comfortable you would be.

Personally, I'd feel very comfortable. A normal reading of the legislation would say this is safe, whatever HMRC's intentions. The existence of this letter suggests that it is HMRC's reading as well ('HMRC' and 'normal' actually lining up in this instance ). I think it would be at best embarrassing to them if this letter were brought into a tribunal where they were arguing the opposite. It's not as if they can say, 'The letter writer was wrong, the legislation is clear.' The legislation is certainly not clear that the interpretation in the letter is wrong, it seems reasonably clear that the interpretation is right.

You can read the legislation for yourself here: Finance Act 2016

Note that this discussion has been focused on Condition C. You might also read Condition D. In your case, I would think it would be very easy to argue that you have not moved to umbrella and wound up your company to receive a tax advantage. You are moving to an umbrella and closing your Ltd because your client will no longer deal with Ltd. Therefore, I think you would also have a strong case on Condition D, which is whether or not the winding up was to gain a tax advantage. You have pretty much ironclad evidence that your Ltd is being wound up because of your client's decision, not just to cash out.

So it seems to me you are on pretty solid grounds on Condition C (even if it weren't reinforced by the HMRC letter) and on Condition D.

And if it were me, I'd go with Maslins, because he has the correspondence with HMRC on the topic. So you aren't relying merely on some link on the Internet, you have the guy who has the actual letter on your side if something goes wrong. He's got a good reputation anyway, but in your case if you are placing any reliance on Condition C, I want the guy who has the letter on my side.

[Amanensia]

Back to the original subject (whether an umbrella role could count as "carrying on the same trade or activity") I found the following communication from HMRC after some digging around online. I believe the original poster, Chris Maslin, is an existing CUK contributor so I hope he doesn't object to me posting the link:

Distributions-in-a-winding-up

Within this are the following comments:
"Condition C is that the individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution."
and
"Condition C will not be met where the individual is employed by an unconnected third party."

It goes on to give an example where condition C is met by someone moving to employment where the new employer is owned by the distribution beneficiary's brother, and concludes that it is only the familial relationship which leads to the condition being met.

This seems to be very clear-cut; Ltd-to-employment is fine as long as there is no existing relationship between the ex-contractor and the new employer, which in my case there obviously wouldn't be.

However the document is unsigned and does not include any HMRC reference number or similar.

I am wondering how comfortable people would feel relying on this as evidence of HMRC's intentions.

[webberg]

Unclear at this stage. I'm currently direct, but LBG use Alexander Mann for processing payments to most LtdCos, including mine. Whether we get pushed through Pontoon or someone else isn't clear; the information we've been given so far is rather sparse. LBG themselves will deal with any FCSA-accredited umbrella, apparently, but whether whatever pseudo-agency is used will have its own restrictions remains to be seen. No doubt there will be some cosy arrangement somewhere...

Shop around.

You cannot be forced into anything.

[webberg]

If you are forced to go through an agency(e.g. Pontoon) then they have a list of brollys you have to use..apparently.

In a legal sense you cannot be "forced" to use an agency and you cannot therefore be "forced" to use their umbrella.

[Amanensia]

Unclear at this stage. I'm currently direct, but LBG use Alexander Mann for processing payments to most LtdCos, including mine. Whether we get pushed through Pontoon or someone else isn't clear; the information we've been given so far is rather sparse. LBG themselves will deal with any FCSA-accredited umbrella, apparently, but whether whatever pseudo-agency is used will have its own restrictions remains to be seen. No doubt there will be some cosy arrangement somewhere...

[BABABlackSheep]

Yeah, that all sounds eminently sensible. Whether HMRC decide they can't resist going after all the MVLs that must be in the pipeline over the next year or so we will have to wait and see!

For the avoidance of any possible doubt, if I do go umbrella, it'll be entirely legit. I have no appetite for dodgy schemes.

If you are forced to go through an agency(e.g. Pontoon) then they have a list of brollys you have to use..apparently.

[Amanensia]

Haha, that's a nice trick. I'm an actuary and well used to calcs around UEL/LEL, EE/ER NI rates etc. Lloyds will be publishing a list of umbrellas they will work with soon so we shall see (a subset of FCSA-approved ones, I believe, and I won't treat that accreditation as meaning very much!) I'll also be asking very strongly if Lloyds will be guaranteeing payments - it's not unheard of for umbrellas to go bust...

[webberg]

I'm sure there are some good recommendations on this site.

I'm sure there are.

Look out for one particular trick.

NIC has three rates of charge.

Annual income to £8,632 = 0%
Annual income between £50,000 and £8,632 = 12%
Annual income over £50,000 = 2%

We have found that some will assume that NIC is applicable to ALL income.

Whilst effect is given to the upper earnings threshold and the rate reduces to 2%, the 0% band is ignored and NIC is collected on this.

This is an additional amount collected by the umbrella, i.e. £8,632 x 12% (£1,035.84).

The claim made by some is that if the contract being quoted for is less than a full tax year (usually the case) then it's "not possible" to give effect to the NIL rate band.

I'm not convinced that is correct. You can seek a rebate when the return goes in, but how many do and what happens to the money retained by the umbrella?

I don't know. For all I know the umbrella and contractor settle up once the contract/year is finished.

We did ask, but we did not get an answer that we could reconcile and eventually those we asked stopped responding.

Be careful.

[Amanensia]

Thanks for that. I'll take the quoted take-home amounts with a pinch of salt - if I know their fees I should be able to work out the rest myself (using my own realistic assumption of number of days worked, rather than the 52 weeks some of the calculators use!) I'm sure there are some good recommendations on this site.