Share this content
30

Will retained profits cause a problem with ER?

Will 300k retained profits in a small trading company jeopardise the Entrepreneurs' Relief?

Didn't find your answer?

One client has around 300k retained profits in his limited company. This amount is much bigger than 25% of the company assets. It is a small trading company without any investments at all. When he sells his company, is he going to have a problem with claiming ER? Will it be deemed to be an investment company?

Replies (30)

Please login or register to join the discussion.

By johngroganjga
19th Sep 2020 21:54

It’s nothing to do with retained profits. It’s about the type of assets it has.

Thanks (1)
Replying to johngroganjga:
avatar
By Oki1970
19th Sep 2020 22:57

johngroganjga wrote:

It’s nothing to do with retained profits. It’s about the type of assets it has.

'Cash rich trading companies can struggle to meet the trading company requirements'

'The general view taken by HMRC is that cash built up should be extracted as a dividend and taxed as such'
.

Thanks (0)
Replying to Oki1970:
avatar
By Tax Dragon
19th Sep 2020 23:20

So advise your client to do that (ideally a couple of years before looking to sell) and your potential argument with HMRC goes away.

(Might want to spread it out on that kind of figure. Or wait until the next Budget, to see what really does happen to tax rates... 20% is still pretty good.)

Thanks (1)
Replying to Tax Dragon:
By johngroganjga
20th Sep 2020 07:27

We are not told whether the company has any surplus cash or not, or indeed any cash.

Thanks (0)
Replying to johngroganjga:
avatar
By Oki1970
21st Sep 2020 21:10

johngroganjga wrote:

We are not told whether the company has any surplus cash or not, or indeed any cash.

Sorry my mistake! Yes the company has surplus cash in the business bank account of the order of 300k. No overdraft.

Thanks (0)
Replying to Oki1970:
RLI
By lionofludesch
20th Sep 2020 07:36

Oki1970 wrote:

johngroganjga wrote:

It’s nothing to do with retained profits. It’s about the type of assets it has.

'Cash rich trading companies can struggle to meet the trading company requirements'

'The general view taken by HMRC is that cash built up should be extracted as a dividend and taxed as such'
.

To clarify John's point, the company could have a lot of debtors and an overdraft. You don't say.

Thanks (1)
Replying to lionofludesch:
avatar
By Oki1970
21st Sep 2020 21:13

lionofludesch wrote:

Oki1970 wrote:

johngroganjga wrote:

It’s nothing to do with retained profits. It’s about the type of assets it has.

'Cash rich trading companies can struggle to meet the trading company requirements'

'The general view taken by HMRC is that cash built up should be extracted as a dividend and taxed as such'
.

To clarify John's point, the company could have a lot of debtors and an overdraft. You don't say.

No debtors or overdraft. The company has surplus cash in the company bank account.

Thanks (0)
avatar
By Paul Crowley
20th Sep 2020 03:12

So. not explicit yet, but is it the case that company has cash in a bank account?

Thanks (1)
Replying to Paul Crowley:
avatar
By Oki1970
21st Sep 2020 21:14

Paul Crowley wrote:

So. not explicit yet, but is it the case that company has cash in a bank account?

Yes, the company has cash in company bank account. Sorry about the late response.

Thanks (0)
Psycho
By Wilson Philips
20th Sep 2020 08:23

You (and perhaps HMRC) need to have a look at recent case law - surplus cash should not in itself be fatal.

Thanks (1)
avatar
By whitevanman
20th Sep 2020 09:02

With respect, I think some people need to read the legislation which says nothing about cash or assets. The test is "activities".
Simply having cash is not an activity. There is much in the HMRC guidance about their approach and the types of thing they take into account but there is not and never has been, a test / condition that refers to cash.

Thanks (1)
Replying to whitevanman:
Psycho
By Wilson Philips
20th Sep 2020 09:11

Agreed. And which was the point laboured in one of the recent cases.

Thanks (1)
Replying to whitevanman:
avatar
By Tax Dragon
20th Sep 2020 09:27

whitevanman wrote:

Simply having cash is not an activity.

Never has been. But checking under the mattress to make sure it's still there is.

John makes a good point though. The statement that retained profits exceeds 25% of assets tells us nothing about what you'd actually see when you checked under the mattress.

Thanks (1)
Replying to Tax Dragon:
avatar
By whitevanman
20th Sep 2020 10:24

To stretch the analogy a bit (!) checking under the mattress may be a non-trading activity but may not amount to much when compared to fully spring cleaning the house.
I agree the OP has not given much detail.
I suppose my bugbear is that I have seen so many ER cases over the years where both HMRC officers and agents have banged on about assets, particularly cash, without ever addressing the truly relevant test. This results, over time, in questions such as the OP and comments such as HMRC expect cash to be paid out as dividends. Somewhere a client is paying for this rubbish!

Thanks (1)
Replying to whitevanman:
avatar
By Tax Dragon
20th Sep 2020 10:51

But either paying out as dividends is a good idea even with ER/BADR, 7.5% being less than 10%, or it's a bad idea even without it, 32.5% being more than 20%.

So I really don't see why clients would be advised to pay dividends for the sake of BADR, if indeed that does happen (the point I tried, but obviously failed, to make with my first response).

Thanks (1)
Replying to Tax Dragon:
avatar
By whitevanman
20th Sep 2020 11:26

Agreed. Any decisions on dividends are for the company and should be based on sound advice. My criticism was aimed at comments such as those made by the OP in the post of 19 Sept at 22.57 pm.

Thanks (1)
Replying to whitevanman:
avatar
By Tax Dragon
20th Sep 2020 11:52

There are many criticisms to be made of that post. Not least that it displayed the same level of laziness and lack of information as in the OP itself.

It also shows what happens when you rely on the rubbish that's all over the internet. Why not look at the rules themselves?

Thanks (1)
Replying to Tax Dragon:
avatar
By whitevanman
20th Sep 2020 13:24

No doubt the same level of laziness precludes them looking at the rules etc.

Thanks (1)
Replying to whitevanman:
avatar
By Oki1970
21st Sep 2020 22:26

whitevanman wrote:

No doubt the same level of laziness precludes them looking at the rules etc.

Thanks for your input and comments. You are also accusing me of laziness. I would appreciate it if you would point me in the right direction in looking at the rules. I could not find anything specific on HMRC website where else do I look?

Thanks (0)
Replying to Tax Dragon:
avatar
By whitevanman
20th Sep 2020 13:25

Deleted duplicate.

Thanks (1)
Replying to Tax Dragon:
avatar
By Oki1970
21st Sep 2020 22:05

Tax Dragon wrote:

There are many criticisms to be made of that post. Not least that it displayed the same level of laziness and lack of information as in the OP itself.

It also shows what happens when you rely on the rubbish that's all over the internet. Why not look at the rules themselves?

Thanks for you comments and criticisms about my original post and subsequent comments. As I explained in replies to others they were not my comments. I was quoting what I read on the internet, and I was seeking advice. Accusing me (someone you don't know) of laziness and relying on rubbish is rather harsh I must admit. I am sorry if I gave you that impression. If I was relying on rubbish I wouldn't seek your advice on this platform.

Thanks (0)
Replying to whitevanman:
avatar
By Oki1970
21st Sep 2020 21:45

whitevanman wrote:

Agreed. Any decisions on dividends are for the company and should be based on sound advice. My criticism was aimed at comments such as those made by the OP in the post of 19 Sept at 22.57 pm.

Thanks for your criticism aimed at my comments in my post of 19 Sept at 22.57 pm. I apologise for not being very clear. Those were not my comments that's why they were in inverted commas. They are the sort of comments I came across when I was doing some research and I wanted to discuss. I sincerely apologise if I have annoyed you.

Thanks (0)
Replying to Oki1970:
avatar
By whitevanman
22nd Sep 2020 08:35

The problem for me is simple.
A tax relief is provided by legislation. For something to do with CGT it is most often found in TCGA 1992.
The guidance to HMRC staff (which sets out HMRC's view of what it all means) is in manuals that are posted on-line. Again this time the CG Manual.
What I find "lazy" is when people seem not to bother with these two places and go straight to the words of wisdom that some know-nothing has posted on the internet. Those posts are then spread as though they were an authoritative statement of law.
So, break with the tradition and have a look in the right place(s).
For ease you could start with the HMRC guidance on Business Asset Disposal Relief (formerly Entrepreneurs Relief) which contains information on all aspects of the relief and references to the relevant legislation and case law. A starting point might be CG63950 or if still a bit lazy you could skip a little closer to the subject of what is a trading company by starting at CG64055.
One final tip. Much of the "trading company" stuff was equally relevant to SSE which is covered in Company Taxation. Not sure if they have now caught up and repeated it all in the CG manual but if you have a spare 10 minutes you could have a look.

Thanks (0)
Replying to Oki1970:
avatar
By Paul Crowley
22nd Sep 2020 08:50

The quote was not attributed.
Who wrote it?

Thanks (0)
Replying to Oki1970:
avatar
By whitevanman
22nd Sep 2020 09:41

As an addition to my other response, I note your OP says "one client..." but previous posts you have made lead me to believe you are not actually a tax professional or an accountant and that the "client" is most likely you.
That being the case and with the amount apparently at stake, it would be wrong of me not to point out that you should speak to your accountant (previous posts indicated you had one) or appoint one very soon. As is often said on here, failure to do so could be far more costly in the longer term.

Thanks (0)
Replying to whitevanman:
avatar
By Tax Dragon
22nd Sep 2020 11:32

whitevanman wrote:

As is often said on here, failure to do so could be far more costly in the longer term.

Possibly too late... sounds like the failure might already be in the past and the long-term might soon be expiring.

If so, good luck, OP. I retract suggestions of laziness. (It's actually a find and replace exercise, but I'll be told off if I post the replacement.)

Thanks (0)
Replying to Tax Dragon:
avatar
By Oki1970
21st Sep 2020 21:29

Tax Dragon wrote:

But either paying out as dividends is a good idea even with ER/BADR, 7.5% being less than 10%, or it's a bad idea even without it, 32.5% being more than 20%.

So I really don't see why clients would be advised to pay dividends for the sake of BADR, if indeed that does happen (the point I tried, but obviously failed, to make with my first response).

Very good point. The comments in my post were not my ideas but examples of what I found on the internet. Hence why they were in inverted commas.

Thanks (0)
RLI
By lionofludesch
20th Sep 2020 14:50

If the client is selling the company, he might find that the buyer isn't keen to be buying company cash . That might be a bigger barrier than your ER problem.

Thanks (1)
Replying to lionofludesch:
avatar
By Oki1970
21st Sep 2020 21:31

lionofludesch wrote:

If the client is selling the company, he might find that the buyer isn't keen to be buying company cash . That might be a bigger barrier than your ER problem.

Very good point. Thanks.

Thanks (0)
avatar
By Paul Crowley
22nd Sep 2020 08:55

Real life
As per Lion, no buyer buys cash without a substantial discount for the latent tax on distribution.
That discount negates any BADR advantage.

Activities
How much time is spent checking the bank statements?

Thanks (0)
Share this content

Related posts