I have a client who owns a personal service company which he no longer needs. The company has £35,000 in the bank. There are no debtors or creditors subject to corporation tax for the year just ended (March) which is expected to be minimal. It seems to me that he could pay himself £10,000 as salary for the year (the previous year it was £8000) which would leave £25,000 to be distributed to him under section 1030A of the Corporation Tax Act 2010 (the replacement for ESC C16) after three months. Does anyone see a problem with this approach?
Thanks for your comments
Replies (11)
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Why salary?
You'd want to make sure the personal allowance was used but otherwise why pay £10k salary and incur NIC when you could pay a dividend which would be tax free. The company would need the reserves to do so but if it's got £35k this would suggest that it has.
The £25k received as a quasi capital distribution may qualify for ER but even so this is paying tax at 10% whereas dividends are tax-free up to the higher rate threshhold. So you could distribute more tax-free as a dividend just leaving perhaps £10 covered by the annual exemption to distribute as capital. It all depends on what other income is expected in 2012-13 of course.
IR35?
Is this under the IR35 provisions, in which case the income is likely to have been taxed already under PAYE as deemed salary?
Just a thought!
We need to know the recipients other income before we can start recommending dividends though.
Dividend now
But can't client pay a £10k divi now, and then make the distribution on closure?
Or are you nervous about that as its close to cessation?
I don't see why?
If you haven't yet applied for striking off there is no question of a dividend being 'caught'. Obviously the client's other income in 2012-13 needs to be taken into account - I said "It all depends on what other income is expected in 2012-13 of course". However, if, for the sake of argument, he didn't have any, what you would do is pay a dividend of £35k (reserves permitting) which would be within the basic rate after PA. The result is tax - zero. Can't do any better than that.
I did suggest salary equivalent to the personal allowance which would be better as it would use the personal allowance but, on reflection, it depends on whether you would get relief for CT. If nothing to relieve against there's not much point but in any case if there is other income that may absorb the PA so you'd pay a dividend to take him up to the higher rate, then pay whatever is left under s.1030A after application for dissolution is made.
We are told that the company is a personal service company, but that does not necessarily mean that IR35 applies. I have assumed it doesn't as that info was not given. I'm simply pointing out the effect of s.1030A, which only applies once you have applied to Companies House under s1003 CTA 2006 as you can see quite clearly from the wording of s.1030A, Up that point a dividend is a dividend. The query was Can We Get Round s.1030A - the answer is you can.
Well ...
... I suppose this illustrates the difficulty of legislating a concession. I take your point but I don't think there is any question of s1030A applying when you don't want it to and I can't see HMRC interpreting it that way. Intentions are of course a subjective matter and introduce a touchy feely aspect which would be best avoided IMHO. I can only think that the words 'intends to' were inserted to deal with the situation where the shareholders take the cash out before the s1003 application has been made. I still don't think there is any question of s1030A being imposed, though of course it has always been possible to trickle the funds out by way of dividend over a period and provided the income remains within the basic rate there is no liability.
Further reading on intention
It seems we are still awaiting HMRC's formal guidance & views on the application of S1030 however CCH's view is that the simplistic (and to my mind sensible) approach is that, if a company has ceased trading, any distribution will be a "relevant distribution" ie it will be "in anticipation" of the final winding up.
In this case therefore I think sebo has hit on the best solution.