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Ltd. Co. Consequences - Contract to Perm

Impact on eligibility to Entrepreneur's Relief if keeping ltd. company going

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A contractor is going to start an employed full time role and has a (and is the sole director of) a Ltd company  with a six figure bank balance built up from 3 years of contract income.    The income from the employment will be in the higher tax bracket.

The contractor wants to keep the company for the time being and possibly for up to 18 months to in case the employment does not work out.   However the company would not be dormant as interest is accruing and being received on the bank balance.  The interest would amount to c. £1k per annum and easily cover any administrative costs of filing, etc.

The ideal scenario is the employment works out and then after about 18 months the company is liquidated in the most tax efficient manner e.g. through MVL obtaining entrepreneurs relief and being liable only for 10% capital gains tax.

1)  Are there any restrictions to watch out for in keeping the company ticking over that might risk the contracting from being to take advantage from entrepreneurs relief?    Note: the company would only have bank interest as income and admin expenses as expenditure. 

2)  Since there is no tax-efficiency in any further PAYE income or dividends being paid from the company as of now would the contactor be better off de-registering from PAYE or simply not being paid for a period with NIL RTI returns?  

Replies (8)

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By SteLacca
26th Mar 2018 12:27

Up to 18 months would take the company past the 12 months trade rule. ER is only available in respect of a trading company. If the only transactions are interest and some generic expenses, it would lose that trading status.

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By Maslins
26th Mar 2018 13:06

I disagree with SteLacca, I think they'll have 3 years grace post cessation of trade. See https://www.gov.uk/entrepreneurs-relief, in particular fairly near the bottom under selling your shares (which I believe is basically what an MVL is equivalent of for tax purposes).

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Replying to Maslins:
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By Melanie1
27th Mar 2018 15:19

Maslins wrote:

I disagree with SteLacca, I think they'll have 3 years grace post cessation of trade. See https://www.gov.uk/entrepreneurs-relief, in particular fairly near the bottom under selling your shares (which I believe is basically what an MVL is equivalent of for tax purposes).

Thank you. It is clear that the qualification for relief is satisfied as long as the shares are sold within the three years from being a "trading company".....the exact point of the company stopping to be a trading company is quite technical i.e. when trading activities cease to exclude to a substantial extent activities other than trading activities - at some point the company's only activities will be earning bank interest and submitting returns/filings...and then I guess the three years would start ticking.

Once scenario to consider is what if after a year or so the contractor does start todo some contract work but continues with the employment.... would the clock be reset and there would be another three years from when the company stopped trading activities?

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By Matrix
26th Mar 2018 14:22

He could still use his dividend allowance. No point in paying any salary as not trading.

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By Melanie1
28th Mar 2018 09:56

Does anyone have experience of the scenario when a company has reduced trading activities but then later resumes them with respect to ER? Specifically, whether the clock is simply reset so that when the trading activities ultimately cease there is still 3 years to claim ER despite the gap in trading that may have occurred.

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By Digit Dabbler
28th Mar 2018 11:49

Would the contractor get ER on surplus cash that’s accumulated in the business?

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Replying to Digit Dabbler:
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By Duhamel
28th Mar 2018 13:23

Yes, cash generated from trading activities should not prejudice a claim for ER. You might like to review Kevin Slevin's article in Taxation 'The Duck Test'.

Although the article is a few years old now, I think it is still correct.

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Replying to Duhamel:
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By Melanie1
03rd Apr 2018 16:02

It does make sense to me that cash generated from trading activities would not prejudice a claim for ER. It was useful to refer to the article and, in particular, the section on viewing income over a longer period. In the case of this contractor it could be in the last 6 - 12 months of the company history interest income could be £1k, but over the period of 3 years trading income was over six figures....so the interest income would not be "substantial" in that context.

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