Liquidate the company, Renewals allowance, Payrolling of benefits

The Government issued another 645 pages of draft tax legislation and notes last week. We have picked out two issues from the draft Finance Bill 2016 which may be relevant to your clients: whether to liquidate their dormant companies and the new renewals basis for items used in let residential properties. HMRC has also set a ridiculous deadline of 21 December 2015 to inform them about payrolling of benefits.

This is an extract from our topical tax tips newsletter dated 17 December 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Liquidate the company
Where a company is liquidated the proceeds received by the shareholders are treated as capital, after the costs of the liquidation are deducted. The shareholders pay CGT on those proceeds at: 18%, 28%, or 10% where entrepreneurs' relief applies. This is a huge tax saving compared to the dividend tax rates of: 7.5%, 32.5% and 38.1% which will apply to distributions from a company in 2016/17.
 
The Government wants to prevent business owners from achieving a “tax advantage” (tax saving), by liquidating their company and starting up the same or similar business in another vehicle. There are already anti-avoidance rules which can be used against such phoenixing, which are explained in HMRC's Company Tax Manual at CT36850.
 
The draft Finance Bill 2016 includes a new targeted anti-avoidance rule (TAAR) that goes further than the current rules. If the TAAR comes into effect as drafted it will tax the proceeds from the liquidation as income rather than as capital, where all these conditions are met:
a)     a close company is wound-up and an individual (S) receives proceeds from the shares;
b)     within two years of that distribution S continues to be, or becomes, involved in a similar trade or activity; and
c)     one of the main purposes of the winding-up is to obtain a tax advantage.
 
Condition b) will apply where the same or similar business is continued as a company, or as a sole-trader or as partnership, even on a much diminished scale.
 
The TAAR is due to apply to distributions made on or after 6 April 2016. Thus to be sure of falling outside of the TAAR, the liquidation must be completed before that date. Liquidations can take many months. If your client has a company which he intends to liquidate to pay CGT on the funds it has accumulated, he needs to act fast to avoid being caught by this new TAAR.
 
Our tax experts can advise you on whether a proposed transaction involving a company's shares will be affected by the draft anti-avoidance rules in Finance Bill 2016.


This is an extract from our topical tax tips newsletter dated 17 December 2015 (5 days before we publish an extract on this blog). it was the last one of 2015. You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>

Relief back-dated, Changes from 1 April 2015, Changes from 6 April 2015

Has the House of Commons been using a time-machine? By the time you read this MPs will have considered, and probably voted through, all 127 clauses and 21 schedules of Finance Bill 2015. We are stepping into our own time-machine today, to look at a tax change which has been back-dated to 3 December 2014, and some of the changes which come into effect on 1 April and 6 April 2015.

Relief back-dated 
In our newsletter on 11 December 2014 we explained the block on using entrepreneurs' relief for gains arising on the transfer of goodwill on incorporation. However, it appears the draft law (which is effective for transfers on and after 3 December 2014), would catch more transactions than the Government intended it to. 
  
Entrepreneurs' relief is in many ways the replacement for retirement relief, which applied from 1965 to the start of taper relief in 1998. The tax cases which considered whether retirement relief applied to the disposal of “part of a business” are equally relevant for entrepreneurs' relief, (see CG64035). Thus when partners retire from a partnership, they should expect to take advantage of entrepreneurs' relief on the transfer of their share of the partnership assets, including goodwill, to the remaining partners, as that is what the relief was intended for. 
  
However, where a partner (P) leaves the partnership and the remaining partners decide to incorporate the business, the gain on P's share of the partnership goodwill would be blocked from benefiting from entrepreneurs' relief. This is because P is a related party to the remaining partners and to the close company that carries on the partnership business after incorporation. Even if there is some delay between P's retirement and the incorporation, this would not prevent the block on the relief due to the anti-avoidance provisions. 
  
The Government has solved this problem by including a new condition in TCGA 1992, s 169LA that introduces the block on entrepreneurs' relief on the transfer of goodwill, such that the restriction won't apply if P is a retiring partner. However, to fit the profile of a “retiring partner” P must not:

• hold or acquire a shareholding in the close company(C ) that carries on the business transferred from the partnership, or in a company that controls C or has a major interest in C; or
• be associated to the remaining partners who become shareholders in C other than as a partner.

This second condition could still restrict the relief for family partnerships where the older generation retires and the remaining younger generation incorporate the business. Our capital gains tax experts can help you decide whether your clients can still claim entrepreneurs' relief on retirement or not.

This is an extract from last week's tax tips newsletter, dated 26 March 2015. The newsletter itself contained links to related source material for this story and the other two topical, timely and commercial tax tips. It's clearly written and extremely good value for accountants in general practice. Try it for free by registering here>>>