Is ER available when closing down a cash rich company?

Is ER available when closing down a cash rich...

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I have made my client aware that HMRC may challenge the Entrepreneurs Relief claim we intend to make when we withdraw the £90k of cash remaining, under ESC C16.  He wants to know the kind of risk that we face - (10% or 50% or 90% etc.) of having the claim challenged, and if challenged what is the likelihood we could win our argument?

The company is about to cease trading, has paid out £34k of dividends every year for several years, one man shareholder director.  The business carries out management consultancy activities.

I have only done this once before and so far no HMRC challenge.

If any one has had more experience of this I would be grateful for your thoughts please.

Replies (16)

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Nichola Ross Martin
By Nichola Ross Martin
18th Feb 2011 12:38

Rumour has it

that HMRC has a resource issue and in unable to checkout every ESC C16 case, so this is why it is currently consulting on removing the concession for all but the smallest cases.

Risk? Well on the basis of the revolting state of affairs at HMRC you might say "low", providing that you meet the qualifying conditions, however, as you can never be 100% sure I would treat the case as if it were high risk and then take all the appropriate precautions (explain the if and buts to the client and make sure that your PI covers you). HMRC could, if minded, throw the transactions in securities provisions at you if you try phoenixing so you should be aware of those. HMRC has not yet tried to apply those provisions in conjunction with striking off, which is a bit odd to me, as this involves a transaction in securities and the obtaining of a tax advantage. I guess that it cannot because if it offers on the one hand a concession under ESC C16 so it can hardly remove it with ITA.

The other matter is to ensure that the company shares pass the tests to qualify for CGT relief.

I have rather a good guide on this topic on my website (below), called "Surplus cash, Entrepreneurs' Relief and ESC C16". Alternatively, a liquidator would cost rather more but guarantee capital treatment.

Virtual tax support for accountants and their clients: www.rossmartin.co.uk

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By Ian Lawrence
18th Feb 2011 12:50

Thanks

Thank you Nicola I shall take a look at your site.

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By blok
18th Feb 2011 12:59

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Not sure I see where the problem lies!

The company is to cease "trading" therefore this suggests that the company is a trading company.

On the basis of what you say I see no issues with claiming relief.  That is after all what it is for.

In respect of the ESC 16 point.  I suggest that this is appled for sooner rather than later given  that HMRC are currently considering effectively withdrawing the concession.

I am unsure why NIchola would treat this as high risk?  Maybe she will elaborate?

Nichola quotes - "The other matter is to ensure that the company shares pass the tests to qualify for CGT relief."

This is not the other matter, this is the only matter!!

Phoenixing and Transactions in Securities!! C'mon lets get real; are HMRC really going to try this argument given the amounts involved.  We are probably talking about 15% differential on £90k.  Especially whilst the ESC consultation process is going on. 

However if you are now sufficiently scared of these subjects maybe you would wish to purchase some additional material on a subject which there is no absolute answer to.  I dont think you would be any further forward however...

As an alternative, you may wish to consider speading a dividend over two or  three tax years, you will possibly find that this is less hassle overall and may work out more tax effective.

 

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By Steve Holloway
18th Feb 2011 13:59

Have a search on AWEB ...

I raised a smiliar question about 3 weeks ago and received comprehensive replies. It seems that large cash balances were an issue under the old BATR but nobody is indicating similar issues under ER. They are, as bloc, points out about to removed ESC16 for anything over £4k so you do need to get a move on. In line with blocs recommendation, I ended up advising my clients to take dividends on 06.04.11 & 06.04.12 and avoid all tax as they genuinely were giving up and will be lower rate peeps after this tax year.

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Nichola Ross Martin
By Nichola Ross Martin
18th Feb 2011 15:15

Sorry Blok

The question was about risk. Seeing as HMRC wants to curtail ESC C16 because it considers that it is being abused there is an element of risk and it is worth explaining the ups and downs, and transactions in securities could well be an issue because it is in HMRC's interst to tackle low value cases because most people would cave in at the mere mention of a tribunal.

The problem is that some of us would like ESC C16 to remain so that we do not have make our clients spend a fortune on liquidators, and so therefore I do not encourage the abuse of the process and I do think that is it proper to point out to clients the problems that they could encounter.

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By blok
18th Feb 2011 15:24

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Fair enough, point well made.

I am still unsure why you would class this as "high risk" though.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
18th Feb 2011 14:39

You can also click the "Entrepreneurs Relief" tag

and it will call up a page of similarly tagged articles. In this instance, however, there are a lot of variants such as Entrepreneur's relief and Entrepreneurs' relief, so the results might be a little patchy, but it should be a good starting point.

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Nichola Ross Martin
By Nichola Ross Martin
18th Feb 2011 16:48

Why the risk?

"I have only done this once before..." HMRC's concession has no statutory backing, its guidance indicates that this is not intended for phoenix activities. So if you keep doing this there is the chance that someone may accuse you of phoenixing, capital treatment will be denied and you look daft having advised your client on the contrary.

Second point is that a company distribution is income according to s1000, so if you are distributing what would normally be income and doing this in such a way as to obtain a tax advantage that would not otherwise accrue to you then that falls within the ambit of the transactions in securities rules. We don't know further detail about this case, but advice should be given about increasing risks by starting a similar business or forming a new company too.

Thirdly, the risk that entrepreneurs' relief will not apply because the qualifying conditions have either not been met or ceased to be met and you have accidently changed stopped trading.

 

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By thomas34
18th Feb 2011 17:08

ESC C16

Coincidentally I started one of these last week and got the client to give the usual guarantees that HMRC require - striking off after the distribution, filing accounts up to cessation, paying the CT, paying any CGT arising etc. It may be that things have moved on since my last effort with one of these but surely HMRC can ask for further guarantees if they want e.g. not phoenixing.

I stand to be corrected by Nichola but is not the £90K a red herring? If the OP's client ceased trading with zero cash and £90K of debtors, would he be posing the question? My understanding was that if the company's income from non-trading (bank interest for example) exceeded its trading profits, there could be a challenge.

There isn't necessarily a tax advantage anyway because, instead of the likely 10% charge, there may be a zero charge over time via the dividend route as Blok has said.

I really don't see what the OP's P.I. cover has to do with the task. As I recently explained to my client we are applying for a concession, not trying to split the atom using particle physics.

Tom Egerton

 

 

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By thomas34
18th Feb 2011 17:11

To Clarify

I wrote this before I read Nichola's last post.

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By blok
18th Feb 2011 18:27

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In refernce to the "once before" comment, that was in respect of the OP not the client.

I guess everyone is entitled to their own assessment of "risk".

Personally, I am not overly bothered about all of this.  Just caveat to the client the risks and away you go.

 

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By Ian Lawrence
21st Feb 2011 12:17

Once before for a different client

Thank you for the debate on this

When I did this "once before" I should clarify that was for a totally different business.  The company in question is genuinely ceasing to trade and the director will be getting a job under PAYE and higher rate tax.  Consequently he is facing either taxed dividends (at least 25%) or CGT at 28% or CGT at the more preferable ER rate of 10%.

It sounds from the comments that as long as we get the ESC C16 approval quickly, the risk of having the ER challenged is extremely low.  The cash is not generating a return worth speaking about so apart from the relatively high cash balance on the balance sheet (there are no other assets to speak of) there is little else to suggest he is not a normal trading company.

Any more clarification will be gratefully received.

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By blok
21st Feb 2011 13:55

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Ian, I think you are OK.

Get the clearance, distribute the funds, report as capital gain, claim ER and then strike the company off.

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By cfield
28th Feb 2011 13:40

Spouse exemption

If your client is minded (and married) he could also gift some shares to his wife ahead of the dissolution in order to utilise her CGT exemption (and basic rate band if she is has any to spare). He would need to agree this with her though, not just assume she's happy with it.

She would not get entrepreneurs relief unless she's been a director, secretary or employee for more than a year, so it may be swings and roundabouts. Also, he should beware of a Thelma and Louise scenario!

Chris

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By Romanista
28th Feb 2011 15:46

ESC C16

If you disclose the full facts of the case relating to the history of dividends then there is a risk that the concessional treatment will not be granted.  HMRC are not supposed to apply the concession where you are waiving normal dividends and replacing them with a dividend on winding up.

 

 

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By cfield
28th Feb 2011 17:13

Romaniska

Where did you hear that? Is there a page in their manual about it? First I've heard of it. Anyway, you wouldn't be waiving a dividend - just not declaring one. Who are HMRC to say whether you should declare a dividend or not? Are they trying to be shadow directors now as well?

Chris

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