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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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.
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).
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.