Distribution of cash on a winding up/liquidation/ESC C16 - procedures, pitfalls?

Distribution of cash on a winding up...

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My client is a consultant operating through a limited company.  He has income from other sources meaning that he would pay higher rate tax on any distributions from the company or any salary paid, and has therefore rolled cash up in the company over a number of years.  He now has around £400K of cash in the company (the fruit of many years' labour).

The isssues that arise are:

- it would be advantageous to get capital treatment on this.  Following the amendments to ESC C16 that would appear to mean a Member's Voluntary Liquidation.

- Is there any possibility of obtaining Entrepreneur's Relief on a capital distribution, or does the large amount of cash in the company mean that it wouldn't pass the 'trading" test?  (My preliminary research strongly indicates the latter but it would be useful to have a second opinion).  The vast majority of the actual income in the company would come from the consultancy activities - as we all know even £400,000 doesn't generate much interest income these days.

Are there any other opportunities/pitfalls I may be missing here?

Replies (14)

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By Maslins
09th Jun 2015 13:26

The trading vs investment is a possible concern...but I'd suggest on the grounds that presumably:
1) <20% of the income has been derived from investment activities,
2) <20% of the owner's time has been spent on investment activities,
3) <20% of the expenses of the company have been on investment activities,
I'd have thought they'd be safe.

If the money's been sitting in nothing more adventurous than a business deposit account, my opinion is they should be fine to liquidate and get entrepreneurs relief.  If they've put it into shares/BTL properties etc then more questionable.

Only other possible "pitfall" is to check that the owner doesn't intend to start up a new company doing something very similar straight afterwards.  If they were, then not only could the ER come under attack, but also whether the distributions would fall under CGT instead of dividends, under the transactions in securities rules.

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By MBK
09th Jun 2015 13:30

The only way you will / can know ..

... whether you'll get ER is to apply for an extra statutory clearance.

Generally, in our experience, they are more relaxed about trading status and large cash balances than you might think. If the cash has just sat there without active management / investment you may just get clearance.

One possibility, if it suits the client, may be to make a large employer pension contribution to bring the cash balance down. the company needs to be trading though. But, with correct timing, you should be able to get CT relief via a terminal loss claim.

In terms of the liquidation itself make sure you get the accounts fully complete before you hand it over to an IP. Make sure you get a fixed fee quote for the liquidation.

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By User deleted
09th Jun 2015 14:12

One query, Maslins

Under what provision do you think ER would be denied if OP started up again?

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By Markhamfc1
09th Jun 2015 14:18

Snap

I'd also be interested to know.

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By MBK
09th Jun 2015 14:21

What I'm sure Maslins will say...

.... is that, if he starts again, he may be caught by the transactions in securities anti avoidance legislation. If he is caught, then there won't be a capital gain at all - so ER cannot apply.

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Replying to petersaxton:
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By Maslins
09th Jun 2015 14:57

This

MBK wrote:

.... is that, if he starts again, he may be caught by the transactions in securities anti avoidance legislation. If he is caught, then there won't be a capital gain at all - so ER cannot apply.

This, poor wording on my part...but yes, if TiS applies, it wouldn't be CGT, therefore ER isn't even a consideration.

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By User deleted
09th Jun 2015 14:26

In which case ...

... his comment is the wrong way around. Because, as you say, there would be no ER to "come under attack".

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By WaldoLydecker
09th Jun 2015 15:15

Thanks to all. I massively appreciate the replies, they have been a big help.

There's no question of a Phoenix type situation - my client works in an area where the work is drying up, which is driving the timing of this.  One thing I still don't know is how long he hasn't worked for - there may be a period of without trading income which I hope won't affect his trading status because there was no deliberate decision to stop trading, just a petering out of the work. It can (quite truthfully) be presented as a period when there was a hope that there would be more work but there wasn't. Maybe it adds a bit of urgency to getting this done though.

MBK I'm interested in why you think it important to get accounts complete.  I will be preparing accounts to the most recent balance sheet date - should I also be preparing accounts up to the date of the liquidation?

Your point about agreeing a fixed fee is well made.  I would assume it will be a question of shopping around for a liquidator with a professional reputation and competitive price.

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By andrew55
09th Jun 2015 15:40

Liquidator

If it was my client, I'd be talking to Maslins! The accounts need to be complete, PAYE scheme closed, VAT deregistration done etc so the liquidation is straightforward.

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Replying to gainsborough:
By cfield
10th Jun 2015 12:47

ER time limit may be relevant

You only get 3 years to dispose of a company once it has ceased trading if you want to claim ER, so time may be of the essence.

When exactly a business ceases trading has always been a rather vexed question, not just for ER but also for claiming directors fees as a trading expense and terminal loss relief. The ideal answer is "when the director says it did" but this will not always cut the mustard, especially if he hasn't worked through the company for a number of years.

I always urge any clients of mine in this situation to advertise for work shortly before closing the company. Go to a few agencies and send out your letterhead. It might reduce the risk in some cases, provided you could show it was genuine and not just a sham. Still, in my experience, the taxman never queries it anyway.

As for "moneybox" companies, the 20% rule applies across the board. The taxman can't pick and choose which element he wants this to apply to. Provided the cash came from trading activities, the client should be OK, although several years of dormancy might tip the balance against trading. HMRC always seem to have operated the ER regime with a light touch, even when the lifetime limit went up to £10 million, so in most cases these fears are unfounded.

Regarding the MVL itself, I got a quote from an online IP the other day for a £60k one-man company of just £750 + VAT and disbursements. I always thought the fees would come down for "easy" cases and that seems to be what has happened. Only 3 years ago I was quoted £5k by a city firm for the same type of client in the wake of the C16 scrapping. Shame they're not allowed to pay referral fees!

By the way, ESC C16 wasn't just amended or put on a statutory footing. It disappeared altogether. The new rules are contained in CTA 2010 s1030A and are pretty much the same apart from the infamous £25,000 cap. Importantly, there is no longer a need to make "undertakings" as under C16 so you could in theory start a new company doing the same thing, although as previous posters have said, it could still fall foul of the ant-avoidance TIS rules.

As for the final accounts, the corporation tax period ends when the company ceased trading. There might be a subsequent tax period if the company receives income afterwards (say bank interest) and if that is the case, further employment costs can be incurred (e.g. salary, mobile phone bills, childcare vouchers) until the PAYE scheme ceases. These can be offset and carried back, claiming terminal loss relief against profits over the last 3 years if necessary.

The director may also be entitled to statutory redundancy pay. HMRC allow this even if there is no service contract. The liquidator fees, however, are not tax deductible as they are not trading expenses.

That tax period then ends when the liquidation commences. By that time, it is a good idea to have cleared down the balance sheet with as few assets and liabilities as possible, probably just the bank account, corporation tax bill and director's loan account.

 

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By WaldoLydecker
10th Jun 2015 14:10

I've now spoken to my client and it appears likely that he will go down the MVL route.  I've mentioned Maslins to him and based on their online presentation I think that it's quite likely that we will use Maslins however that's still to be finalised.

I have some other thoughts and would be most grateful for any input:

- what, if any, are the risks that HMRC could argue a company is not trading because of the time lag between its final income receipt and the commencement of a liquidation?  There will inevitably be some passing of time during which the company could be argued to be "not trading". (I think I may have more than one client in this situation).

- I'm a little puzzled by the reference to "obtaining statutory clearance" in MBKs post.  Is this a reference to ESC C16 clearance?  Is there any point in trying to obtain clearance nowadays for an amount in excess of £25,000?  Or am I missing something?

 

 

 

 

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Replying to Wilson Philips:
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By Maslins
10th Jun 2015 14:32

Entrepreneurs relief etc.

WaldoLydecker wrote:

I've now spoken to my client and it appears likely that he will go down the MVL route.  I've mentioned Maslins to him and based on their online presentation I think that it's quite likely that we will use Maslins however that's still to be finalised.

I have some other thoughts and would be most grateful for any input:

- what, if any, are the risks that HMRC could argue a company is not trading because of the time lag between its final income receipt and the commencement of a liquidation?  There will inevitably be some passing of time during which the company could be argued to be "not trading". (I think I may have more than one client in this situation).

- I'm a little puzzled by the reference to "obtaining statutory clearance" in MBKs post.  Is this a reference to ESC C16 clearance?  Is there any point in trying to obtain clearance nowadays for an amount in excess of £25,000?  Or am I missing something?

Cheers.  In case not clear, Maslins is "just" an accountancy firm, doing accounts/tax returns mainly for Ltd Co contractors/freelancers.  Business you may well be interested in for this purpose is MVL Online.  I am partially behind both businesses which I'm sure many regulars on here will know, I just post under Maslins as that's what I started as (and following "Alter Ego" thread going on at the moment having multiple aliases seems a no go).

I think you get up to three years post cessation of trade where entrepreneurs relief can still apply.  Again if your client were to be actively investing in that time (eg doing something more complex than leaving the cash in a deposit account) you might be putting yourself at risk...but generally I don't think this should be an issue.

Don't think they'll have been referring to ESC C16, that's one for the history books.  However you can write to HMRC in advance of a transaction (pretty much any transaction as far as I'm aware), basically saying "this is the scenario, this is the tax rules that I think will apply, please confirm".  If they confirm and you then do the transaction as described, much harder for them to later challenge the treatment.  Some would therefore say it's a great idea to deliver certainty.  Others would say it's sticking your head above the parapet, saying "I think this case is borderline but I'm hoping it'll get the more lenient treatment" and that you're better off just going for it.

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By User deleted
10th Jun 2015 14:30

Clearance

I suspect the reference was in the context of trading status

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By WaldoLydecker
10th Jun 2015 15:07

Thanks very much. I didn't know that HMRC would give advance opinions on any transaction - that surprises me.

Actually I have another client who is in a similar situation although the amounts involved are substantially smaller (probably around the £40K mark).  He may well decide to go down the MVL route if the sums make sense, although it may also be possible for him to get cash out another way and get under the £25K.  So there are possibly two clients who may be interested in your services!

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