Contractors' Questions: Am I eligible for Entrepreneurs' Relief?

Contractor’s Question: Is a personal service company contractor who is winding down entitled to Entrepreneurs’ Relief (ER) when the only asset is 'cash,' provided these reserves are greater than £25,000? Could it potentially be argued that the business is not trading as the only assets are cash, and therefore the 80-20 rule is breached? Or is ER available as the business is trading - and it is considered a disposal of shares?

Expert’s Answer: To qualify for Entrepreneurs’ Relief, the company must be a trading company for at least the 12-month period up to the date of cessation of the trade. It is then necessary to wind up the company within three years of the cessation date to qualify for ER.

Where the company is trading and has no obvious non-trading activities, save for the fact that it has significant cash balances, then ER could be in jeopardy. However, the 80:20 test is applied by looking at assets, which may be an issue in the case of large cash balances, income and time spent by directors and staff.

It may be that cash could represent more than 20% of the company’s assets, but it is not likely to represent more than 20% of income or time spent. Therefore, looking at these criteria as a whole, there is a very strong argument that the cash does not stop the company from qualifying for ER.

There are two further points for you to consider:

  • It is important to look at the excess of cash over what is required for use in the trade, so don’t simply look at total cash balances when applying the 20% test.
  • It is understood that HM Revenue & Customs don’t take the point with surplus cash where this has been generated from trading activities.

If the company has assets to distribute of more than £25,000 then, in order to have a capital gains disposal, it will be necessary to formally liquidate the company. Lastly, a review of the accounts of the company for the last three years by a tax adviser is strongly recommended.

The expert was Mike Hayes, tax partner at top 20 accountancy firm Kingston Smith LLP.
 

Tuesday 4th November 2014