In the Autumn Statement, proposals were announced to change the treatment of assets on a winding-up – which for small businesses and contractor companies often means the cash in the bank that has been retained if it was surplus to day-to-day requirements. It has long been possible to wind up the company in these circumstances, and usually by appointing a liquidator, secure capital treatment for the assets, which in broad terms usually means ‘getting the money out of the company for as little as 10% in tax’.
This tax rate has tempted a few ‘free-thinking’ business people into setting up companies, and then choosing not to draw their usual level of income as dividends, planning to draw money out later at a lower tax rate via a winding-up. Such individuals would often plan to do this over and over again, and such behaviour has long been frowned on by HMRC, as it falls foul of the anti-avoidance rules which seek to identify people using a scheme or system of transacting, mainly in order to avoid tax. This kind of arrangement is not something we would recommend.
The Autumn Statement proposals would strengthen the ability of HMRC to rule more winding-ups as not genuine, and treat the pay-outs as income rather than capital, which will be taxed at the new dividend rates of 7.5%, 32.5% or 38.1% instead of 10%. The new rules are expected to come in from 5 April 2016. There is concern that these new rules may be drafted so broadly as to make most windings up an income rather than capital transaction, significantly increasing tax bills.
So, is there any action you should consider taking? If you are currently trading through your company and intend to continue doing so, then arguably there’s nothing to do, as any winding up entered into if you plan to continue to trade would normally fall foul of the rules as they currently stand. But if you are sitting on a company that you are no longer using or whose trade may soon cease then it may be worth talking to a liquidator now, to see if it’s feasible to close things down before 5th April 2016. The tax point is usually the date of the payments from the liquidator to the shareholders, so the company doesn’t necessarily have to have completely closed by this date to have a ‘tax point’ before it.
It should also be noted that depending on the exact detail of the rules, it may well be the case that a winding up after 5th April will still get capital treatment in most situations. This will depend on how HMRC choose to draft the legislation. It is up to individual clients to decide if they are happy take the risk that the changes won’t affect them, if they genuinely have the opportunity to decide when to liquidate. Liquidators report that they have seen an increase in enquiries and are being asked to try to ensure that payments are made on any liquidations ‘in progress’ prior to any possible changes coming into force, in an attempt to secure the current tax treatment.
So – if you are in the unusual position of having a choice over when you liquidate a company, it’s well worth thinking about it now. We can introduce you to a liquidator if you’d like us to, and go over the detail of the proposals and how they might apply to your circumstances.
Please speak to your usual contact or call us now on 0800 25 26 40.