Key points you should know
As currently drafted, the suggested amendments will affect the distributions made on or after 6th April 2016 regardless of the commencement date of the Liquidation.
A company would need to be in Liquidation by 10th February 2016 to give it the best chance to have the distribution made before 6th April 2016.
(It is important to state that we cannot make any guarantees regarding the actual date of distribution because this is dependent on how quickly the banks act.)
Below are the comments we have passed to HMRC and ICAEW…
HM Revenue & Customs has issued a consultation document to address the government’s concerns that some people are arranging their affairs solely to take advantage of lower tax rates.
The consultation will run until 3 February 2016, with the new draft legislation expected to be part of Finance Act 2016 and to apply from 6 April 2016.
The consultation may open up issues that hadn’t been considered in its initial preparation, which could cause a delay in its implementation. Or it could go through as planned. Clearly, no one can be sure.
Members’ Voluntary Liquidations (MVLs) are under the spot-light
Regarding MVLs, one point in the consultation document which is open to interpretation is where it says the new Targeted Anti-Avoidance Rule would treat a distribution from a winding-up as if it were an income distribution, where:
“Within a period of two years after the winding-up an individual continues to be involved in a similar trade or activity…”
We can think of a couple of scenarios where entrepreneurs could end up being caught out in a way that we don’t believe would be within the intention of HMRC. For example:
- a chemical engineer has a Company trading in the pharmaceutical industry and is moving to the oil industry. To make the process clear cut, he wants to liquidate the ‘pharmaceutical company’ and start up an ‘oil company’.
- a director wants to sell their company. The buyer wants the business, but not the company. The buyer also wants the director to help the business for a transition period of 12 months – either as an employee or a consultant.
Would these be deemed a “similar trade or activity”? Or are they significantly different?
Another aspect of the consultation document that is open to confusion is where it refers to the government’s concern about “Moneyboxing”, which it describes as:
“…where the shareholders of a company retain profits in excess of the company’s commercial needs and so receive these profits as capital when the company is eventually liquidated…”
Surely it is up to the business owner to determine how much profit they want to retain for any future ventures or investments they may want for their company? How can anyone else determine what is “excess of the company’s commercial needs”?
There are many reasons why a Company might want to retain funds greater than its immediate needs e.g. as a war-chest against a period of poor trade or a surprise such as a bad debt; or to fund future ventures/product lines etc. Are HMRC proposing that they will now be involved in the decision about how much working capital a Company requires?
We do understand the government’s intention of reducing the occurrence of tax avoidance, however we believe this consultation document is too loosely worded as it stands; and could end up catching out genuine entrepreneurs.
Contractors are vital to the UK economy, along with the many service providers who support them (including Contractor Accountants and Umbrella Companies). This whole sector is likely to be effected by the various different ways the government is targeting it in its attempts to generate additional revenue.
The effect of the proposed changes in this consultation document could end up losing the support of the contractor market, whilst not actually raising much extra revenue in the process. The net result could be damaging to the whole UK economy.