Contractors' Questions: Does the new tax year affect Entrepreneurs’ Relief?

Contractor’s Question: I'm moving to employment and want to know about Entrepreneurs’ Relief. For example, how can I benefit from ER when liquidating my PSC to go permie? Or were the benefits better before April 5th, or are they now non-applicable as it’s after April 5th?

Expert’s Answer: Now that the dust has settled after the March 2016 Budget and the full details have been published in the Finance Bill, the optimal course of action before the Budget seems to as optimal post-Budget, because you are closing your company for a genuine business reason, i.e. to stop contracting and go into employment. 

Under this scenario, Entrepreneurs’ Relief will apply to any funds taken out as a capital distribution either before or after April 5th 2016. The only caveat is that if you go back to contracting within two years of closing your company and open another one, HMRC will have the right to claw back the Entrepreneurs’ Relief you have received and raise an additional tax assessment at the higher rate.

An additional word of warning though. The March Budget introduced some new anti-avoidance measures which did take effect from April 6th 2016, aimed at what HMRC considers to be artificial use of companies to turn revenue profits into capital payments and so reduce the tax payable. The amendments are mainly focussed on what are usually referred to as ‘moneyboxing’ and ‘phoenixism.’

The first of these terms relates to where profits are allowed to accumulate in a company before being extracted in capital form by way of a solvent liquidation (a Members’ Voluntary Liquidation). The second is where a trade is carried on in a company (e.g. a major long term contract) until the project is finished, when the profits are taken out as a capital distribution, also through a MVL

In addition, Budget 2016 also introduced measures aimed at attacking another means by which money is sometimes taken out of a company. This is where the shareholder is given a loan by the company, which is then written when it is liquidated. The technical term is a ‘participator loan’.

These are highly technical issues and you should strongly consider taking professional advice to ensure that in winding up your company you don’t fall foul of these new provisions, because if you do, the downside is not just paying more tax, but can also involve substantial interest charges and penalties.

The expert was Nick Hood of Opus Restructuring.

Monday 11th April 2016