ER for cash-rich company - how much is too much?

I understand HMRC won't pre-clear ER for MVL. Has anyone seen similar case to this before please?

Didn't find your answer?

1) UK LTD company contains £1.5m cash from previous activities and a £1m residential property bought in 2014 with a view to "trading on" at a profit 

2) The company intented to use most (80%) of its retained cash in 2014 to start trading and refburbing properties but got stuck holding the initial property purchase between 2014 and now as it arguably overpaid initially. Today the company has exchanged on the property on its balance sheet, with completion Jan 2020.

3) On completion date in Jan 2020, company will therefore have £2.5m cash, and a £30k p.a. loss-making new food business in it

4) There is plenty of evidence that the company tried to sell the property in the meantime, and considered other property develoment opportunities in order to maintain "trading" status.

I am aware of HMRC guidance on ER and would appreciate help on the following:

a) does holding the property and renting it out as no buyer could be found until today definitely constitute "trading"?

b) does the amount of unused cash retained while looking for other property development opportunities harm this?

c) owner wishes to MVL the company and retire

Is ER on 100% of the assets very likely or very depenent on particular tax office? How can we bolster position to be certain of getting ER?

Thank you.

Replies (14)

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Psycho
By Wilson Philips
26th Nov 2019 14:27

You might want to have a look at the recent case of Gatebright (Mr and Mrs Potter)

http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11309/TC0...

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Replying to Wilson Philips:
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By Bobbo
27th Nov 2019 14:25

It amuses me that the company is referred to several times as 'Brightgate' in that document.

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Replying to Bobbo:
Psycho
By Wilson Philips
27th Nov 2019 14:56

I know - when I was trying to dig out the case reference I couldn't remember if it was G___b___ or B____g____

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Replying to Wilson Philips:
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By srrwilliams
27th Nov 2019 17:21

Thank you. On the basis of that case, it appears reasonably likely that we would get ER given that:

1) we have proof that the company in question intended to continue trading activity throughout the period from auction entries and instructions to estate agents to sell the house

2) there are other small amounts of consultancy income

3) 40% of capital was tied up in the property the company was trying to trade

I'm grateful to you for this article. If anyone knows any counterfactual articles, I would be glad to read them, too.

The bigger question is would ER still be valid if it had been applied for before a Labour government was elected on 13 Dec 2019?

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Replying to srrwilliams:
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By whitevanman
27th Nov 2019 18:57

The principles applied in Gatebright are, unquestionably, correct. Whether you would regard the actual decision as correct, would depend on your view of the "facts" presented and accepted.
In your case, as all others, it will depend on the facts and what you can produce to support your case.
One significant issue will be about what the company actually did, both generally and as regards the other £1.5m that it held in the period between acquisition of the residential property and its eventual disposal. There are many other areas you would also need to address. Dont expect HMRC to agree simply because you cite the Gatebright case.

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Replying to whitevanman:
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By srrwilliams
02nd Dec 2019 15:08

Thank you. What are the other factors you mention?

The company in question here was looking for other property to refurb and there is documentary evidence of that, but for only maybe 20% of the time spent managing the property, and general admin on the company.

The cash was definitely sitting on the balance sheet, available to be used, but not used because the director assessed that his hurdle rate of return (12-15%) was not met by any of the property development projects shown to him.

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Replying to srrwilliams:
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By whitevanman
02nd Dec 2019 16:44

I'm not sure there is enough space to cover all potential issues / questions.
You would start with the previous activities, what were they, when and why did they cease. Why was the company holding (what seems to be) £2.5m?
Then, when and why was the residential property bought? Evidence of trading intention? Previous experience? What were they intending to do with the property, did they do it and if not why?
You say they intended to use the £1.5m for other deals. Why did they not do so? If they really intended a property trading business they would not have stopped just because one property proved a little difficult to sell. What did they do with the money? Was it "better employed"?
As to ER generally, the issue is all about activities. So you need to establish what was done by the employees / directors on a day to day basis. Where was the money invested and what activities did that involve (reviewing investments etc).
You need to show that there was a property trade, that the extra cash was intended for / needed for that trade and that the activities of the company, its staff and directors were substantially trading and that activities of a non-trading nature were not substantial.
As I say, it all depends on the facts and no one factor will be decisive. It is a balancing act.

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Replying to whitevanman:
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By srrwilliams
02nd Dec 2019 17:28

Client:

1) is sole owner of company
2) £2.5m of cash was built up from previous consulting activities in software
3) bought house to diversify into property trading and development in 2014
4) immediate sale of 1st property at a profit fell through, so became "accidental" landlord
5) marketed the property every year with estate and auctions, could never recoup cost
6) in that company, spent 80% of his time looking after that house and assessing other property development opportunities (many emails confirming this)
7) that company took at most 10% of his total time compared to other, separate, employment
8) remaining £1.5m cash was kept on a standard current account immediately available as they bid on some other properties between 2014-2016
9) looked at fewer opportunities from 2016 onwards as they didn't like Brexit and decided the gains of say 12-15% from property refurbs would be mostly offset by falling property prices in London
10) in 2017 agreed a price and tried to buy a b&b business through the company, vendor pulled out. That would have taken £1m of the cash, plus £200k for refurb, leaving rest as working capital including 50k increased marketing spend etc.
I would be very interested if you have experience of whether this is "trading" It's not my area and I think it's arguable, but there's a huge tax bill if we get this wrong.

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Replying to srrwilliams:
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By whitevanman
02nd Dec 2019 18:31

The questions I posed were intended to indicate the type of area / issue you would need to consider. They were certainly not an exhaustive list of questions that might be asked.
That said, on the information given, I should say that the greater problem would be in establishing that the activities carried on by the company, from 2014 on, amounted to trading. Simply buying a property with a view to selling at a profit isn't enough (not least because it seems not to have happened that way). Reviewing other possible acquisitions is equally not decisive.
The proposed acquisition of a B&B merely raises the question of "with what intent". Did he intend running a B & B?
Again in all this, exactly what experience / knowledge did an IT professional have to carry on a property trade (or a B&B). Did he set about these activities in the way that someone carrying on a trade would or does it look more like investment or a hobby?
Also, you say this company only took 10% of his time so what else was he doing? I'm not saying he couldn't have carried on a trade but certainly these factors make proving the case more difficult. At the end of the day it all comes down to how strong a case you can put together. I would say that from an ER point of view, the holding of the £1.5m in the circumstances described, should not be fatal as the extent of activities seems to be negligible. The problem is that the trading evidence is similarly little at this stage.

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Replying to srrwilliams:
7om
By Tom 7000
02nd Dec 2019 14:54

Lets hope they dont get in...

if you are earning 50-60k as a company then tax is

CT 26%
Dividend tax 40%
Student loan 9%
Child beneft withdrawl 24% - 3 kids

Thats 99%

Whats the incentive to work?

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Replying to Tom 7000:
Psycho
By Wilson Philips
02nd Dec 2019 15:17

You sound like a Daily Mail headline writer.

If you spend a little more time you'd realise that the effective tax rate is nowhere near 99%. Potentially painful, yes, but no need for the hyperbole.

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Replying to Tom 7000:
paddle steamer
By DJKL
02nd Dec 2019 15:32

Try lower with the CT rate (Small Company Rate proposed at 21%) and note that the individual will be quite unlikely to suffer tax at a marginal 40% unless he/she has other earnings. There should also be no child benefit withdrawal if individual earnings kept below £50k

As a start say £60k profit in company before tax, CT @21% leaves £47,400 to pay as dividends- work on from there using personal allowance and basic rate band.

Also remember that straight adding together of tax rates is incorrect where one is applied to the remainder left after a previous rate applied.

Do you perhaps advise Boris and Jeremy on tax?

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By sammerchant
02nd Dec 2019 10:53

I recall that during the recession that started in 2008, most, if not all, of the building companies were stuck with unsold stock. They sought a dispensation from HMRC to let the properties without jeopardising their trading status.

That's all that I remember. Does anyone have more to add?

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Replying to sammerchant:
paddle steamer
By DJKL
02nd Dec 2019 15:39

I thought it was more re vat clawbacks arising from short term exempt letting, I thought the courts had long ago decided letting of property intended for resale for shortish periods was still trading.

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