John Bell, chartered accountant and insolvency practitioner, discusses things contractors shoulod think about ahead of the upcoming budget.
March 11th is the date that the Government has set for the Budget and speculation is growing about what the government intends to do with Entrepreneurs’ Relief (ER). A Labour led government seemed set on scrapping ER completely, and whilst the Conservatives are back in Number 10, there’s still a chance this may still happen.
While expressing strong support and encouragement for entrepreneurship, the Conservatives have stated that they plan on reviewing and possibly reforming ER. The possibility that ER could be heavily reformed or scrapped altogether could encourage many directors to consider closing down their companies in order to make sure they get the tax savings available.
How does Entrepreneurs’ Relief work?
If you’re considering selling or winding up your business, ER has the potential to help you make considerable savings on your tax bill. This is because it enables you to pay just 10% in Capital Gains Tax (CGT) on profits over the lifetime of your business, up to £10m, as long as certain qualifying conditions are met.
Since the 6th of April 2019, the holding period for qualifying shares has increased from 1 to 2 years. In addition, revisions were made to the minimum 5% shareholding requirements to include a 5% economic interest test as well.
However, now it seems further reforms have been called for by the Government. Whilst it’s pure conjecture at this stage, and there’s no guarantee any reforms will be made to ER, changes could be made and come into effect from 5 April 2020 (if not from the Budget date itself).
When the reform does come, it’s likely to be a tightening of the rules as opposed to a loosening. So, if any business owners are already considering closing down their business, they are encouraged to speed up their decision process. Delaying until the Budget may mean being taxed very differently from the present ER regime, and losing out on tax savings.
There are different ways for you to close down your solvent business, but depending on how much cash there is in your company, the most tax-efficient way could be through a Members’ Voluntary Liquidation (MVL).
John Bell is a chartered accountant and insolvency practitioner who founded Clarke Bell in 1994. Here is his advice to contractors considering winding up their companies.
1. What is a Members’ Voluntary Liquidation?
An MVL is a process used to wind up the affairs of a solvent company and typically used where a company has come to the end of its life – the Off-Payroll reforms will undoubtedly prompt such a process but retirement or entering full-time employment could also be valid reasons to close a personal service company. The process of an MVL facilitates a controlled exit enabling shareholders to realise any investment in a tax efficient and advantageous way, as any money distributed to shareholders represent a return of capital, on which capital gains tax is payable by the shareholder. Where the assets of a company are more than £25,000, any capital distribution can only be carried out by a liquidator. And, any distributions found by a liquidator are taxed as capital distribution, which is tax on the capital gain, the gain in the value of the shares compared with the amount which the shareholder paid for them. The advantage for contractors is that money received as a capital distribution may qualify for Entrepreneurs’ Relief. However, the shareholder must own at least 5% of the shares for at least one year prior to liquidation and any assets must be distributed within three years.
2. Voluntary Strike Off
A contractor closing down a business can apply for voluntary company strike off at Companies House but a Members’ Voluntary Liquidation (MVL) may be more appropriate. A strike off request could be turned down if a business has creditor agreements in place, has traded over the last three months or has changed names over the last three months.
3. Administrative process
It is important to apply to Companies House using a DS01 form which contractors will need to complete to start the process to close down a company. Any co-director, such as a spouse, will also need to sign the form.
4. Any shareholder, creditor, trader, insurance company and bank will need to know about the plan and be sure that a contractor has no outstanding payments due to HMRC, such as Corporation Tax, VAT, NICs and, if applicable, PAYE. All paperwork should be forwarded to HMRC along with a final set of accounts from the date of a contractor’s last set of accounts to the final trading day. Contractors must also inform HMRC to cancel any VAT registration which could take up to three weeks to be confirmed, and submit a final company tax return which covers the period from the last tax return to the final day of trading, taking account of VAT on stock and business assets.
It is important to extract any retained profits as a final dividend before any liquidation process begins. How a contractor takes this will depend on the exit route chosen and how much profit is left in the business. An MVL is the most tax-efficient method once the tax savings made from Entrepreneurs’ Relief has been taken into account.
If the profit held in the company is under £25,000, shareholders pay Capital Gains Tax. However, if a contractor is eligible to apply for Entrepreneurs’ Relief, he or she would pay a tax rate of 10% regardless of the rate of personal tax paid.
If the profit held is above £25,000, the distributions will be deemed as income and subject to Income Tax and the income is typically taken out as a final dividend not as salary.
My advice to contractors ahead of the budget is to speak to your accountant now so that you can weigh up the best options for you and your business so you don’t miss out.