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AIA

PTP's Tax Tip No 1 ' Cash deposits in companies and business taper relief on shares

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3rd Feb 2006
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Q - My client company has a successful plumbing business (turnover about £2 million, pre-tax profit about £300,000). The proprietor is very well off and does not draw much from the company. Cash balances have built up to nearly £200,000 and the company bankers operate a sweep arrangement between the current account and a deposit account to maximise interest. From time to time some of the cash is put onto three month or six month deposit to generate a better rate of interest. Should I be worrying about the possibility of the shares losing their eligibility to business asset taper relief?

A - See http://www.hmrc.gov.uk/ctsa/ctocc-21-09-05.htm
In answer to a direct question HMRC have answered 'Inspectors have certainly not been asked to challenge all large holdings of cash. HMRC think that it will often be the case that a reserve of undistributed profit on deposit could not be said to constitute an activity in itself. However, there may be an investment activity where the amounts involved are significant relative to the trading activity and are held over a long term.
Additional factors to consider might include:
' the present and future cash flow requirements of the business,
' the nature of the underlying investments used as a lodgement for the funds,
' the extent to which these investments are managed, and
' whether the funds have been ear-marked for a particular use in the trading activity.'
This statement is clearly very helpful to shareholders like your client who own successful trading companies that have retained trading profits as cash rather than distributing them. The less active management of the cash deposits the better, although the level of management suggested in your query is probably acceptable.

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