Business Asset Disposal Relief and trading status

Wondering what HMRC's current thinking is

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Hi all,

I have a PSC client with retained profits of circa £400K, all sitting in a non-interest earning bank account.

The director/shareholder would like to invest about £200K of the retained cash into a company savings account in order to earn some interest.

I know that historically HMRC aren't likely to be concerned with cash held on deposit from accumulated profits vis-a-vis company trading status for Entreprenuers' Relief (now BADR), however has anyone got any recent experience of HMRC's current views on holding such cash in a savings account, rather than a current account. Obviously the cash won't be actively managed, but it will be earning interest and not immediately accessible, and so I just want to make sure that it won't cause any problems down the line.

Thanks all.

 

Replies (8)

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By nrw2
08th Jan 2024 10:34

I can't believe that whether a bank account is paying interest can affect BADR.

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Replying to nrw2:
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By FactChecker
08th Jan 2024 14:29

Well it shouldn't ... but 'cannot' is a very confident answer.

OP's "I just want to make sure that it won't cause any problems down the line" is equally optimistic (that is the 'making sure' element), as HMRC will look at the specific circumstances IF they decide to query it.

My thoughts (not advice) are that, as well as not placing the funds or moving them around in a way that could be construed as investment, it would be 'helpful' if ... (a) duration of the deposit was shorter rather than longer, and (b) the sum represents a relatively minor portion of the company's assets.
Both of course are subjective aspects, which is why you'll not get a definitive answer (from me or indeed from HMRC)!

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Replying to FactChecker:
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By nrw2
09th Jan 2024 09:43

Yes, my reply was based on the only variable mentioned in the original post which is whether or not interest is paid.

If the term / cash amount / etc changes then this may of course affect BADR, but as I said I cannot believe that moving a fixed amount of cash from one bank account paying no interest to another paying interest can affect BADR all other things remaining equal!

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By HowLongIsAPieceOfString
08th Jan 2024 16:34

Software Seeker wrote:

I know that historically HMRC aren't likely to be concerned with cash held on deposit from accumulated profits vis-a-vis company trading status for Entreprenuers' Relief (now BADR)

 

Not sure I entirely agree as I always thought HMRC applied their 20% 'substantial' rule, at least until it was tested in case law.

I agree with FactChecker's comments. CG64090 is useful reading and you will find previous discussions of this matter including relevant case law using the search function.

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By Taxguy96
09th Jan 2024 08:14

The decision in J and N Potter v HMRC is interesting, whilst the case primarily focused on the trading status of the company, from recollection the company also acquired investment bonds (so clearly more than just a savings account), BADR was held to be available.

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By TheTaxMan_
09th Jan 2024 21:49

I agree with @Taxguy96 the Potter v HM case should help, it's the most recent/relevant case as far as I am aware.

Having a large cash balance on its own shouldn't mean the company isn't a trading company. HMRC would have a hard time arguing that transferring funds into a higher interest savings account would amount to non-trading activities. Especially considering how effortless it is to transfer funds and also the level of funds it will generate.

HMRC's guidance RE the 20% test is guidance and not law.

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Replying to TheTaxMan_:
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By FactChecker
09th Jan 2024 22:33

"HMRC's guidance RE the 20% test is guidance and not law"
... is precisely why I previously said "of course (these) are subjective aspects, which is why you'll not get a definitive answer (from me or indeed from HMRC)!".

OP is in realm of second-guessing HMRC's possible interpretation (aka identifying and managing the risk) - which involves being aware of the factors that HMRC tend to consider, and being able to show why you believe that these weren't triggered.

If, for instance the £400k compares to annual profits of under £20k (or if the deposit keeps being moved weekly to chase ever higher returns) that doesn't mean that it IS an investment - merely that any defence, if HMRC see it as such, has been made harder.

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By TheTaxMan_
11th Jan 2024 08:40

I agree entirely

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