Things to watch out when ceasing trading

[dingdong]

I'm about to go permie for a year and plan to leave my current nest egg in my company and continue to draw down dividends, while I see whether I return to contracting and what happens with ER regulations and practice after the budget.

I have a substantial sum of cash in instant access and P2P (30 day access) savings accounts.

If i'm in the situation where I have no trading income and only bank interest would HRMC have sufficient ground to use this as a reason to classify me as an investment company, thereby blocking any future plans to use a MVL? Has anyone experienced HMRC reclassifying them as an investment company after ceasing trading for a while?

Are there any other gotchas I should be watching out for?


Thanks!

[northernladuk]

You should watch out for your accountant giving you duff advice when you ask them this question.

[dingdong]

On this question in particular I find accountants have many different answers, as do the MVL firms. Its always fun to get duff advice on here too.

I'm interested in anyone who has been challenged by HMRC during MVL for having high cash balances and no trading income.
(if they haven't done this to date I imagine they might start if there's a rush of people closing companies this year)

[Maslins]

We're not aware of any ex MVLO clients being challenged on those grounds. However a couple of caveats:
1) a client might be challenged and not let us know...MVLO just does the liquidation, accountant does personal tax.
2) there would inevitably be a hefty delay. Eg liquidation where we distributed funds on (say) 30 April 2015 would be declared on personal tax return to 5 April 2016, which might not be submitted until 31 Jan 2017, hence potentially a challenge could be as late as 31 Jan 2018.

Yes many will say I'm biased, but genuine Q why do you NOT want to MVL now? Is it primarily that you may possibly return to contracting after your one year as a permie comes to an end?

[dundeedude]

We're not aware of any ex MVLO clients being challenged on those grounds. However a couple of caveats:
1) a client might be challenged and not let us know...MVLO just does the liquidation, accountant does personal tax.
2) there would inevitably be a hefty delay. Eg liquidation where we distributed funds on (say) 30 April 2015 would be declared on personal tax return to 5 April 2016, which might not be submitted until 31 Jan 2017, hence potentially a challenge could be as late as 31 Jan 2018.

Yes many will say I'm biased, but genuine Q why do you NOT want to MVL now? Is it primarily that you may possibly return to contracting after your one year as a permie comes to an end?

Given the capital gains tax changes, is there an updated accurate MVL calculator for the tax year 6th April 2016?

I was humming and hawing about performing an MVL, but am not averse to the very idea, although it could be argued it begins to look like a bad idea. Not only does it take at least 6 months to get the distribution of funds into your personal bank account, but the CGT changes could put many off. The benefits aren't as clear-cut as before. It seems that having a dirt cheap accountant who accepts the company continuing in a semi-dormant state would be almost as cheap, whilst continuing to pay out any monies required up to the higher rate tax threshold for each year until the money runs dry.

Suppose what mainly puts me off right now is the uncertainty of what the environment will be for single-person Limited Companies by the time I actually am due to receive the distributions.

Genuine query

[ASB]

With the changes announced to CGT today it may be the case that there is less impact if the MVL route becomes unavailable?

[ITPRO2]

You should watch out for your accountant giving you duff advice when you ask them this question.

Please stop

[badgernumber1]

I asked my accountant a similar question last year. Their in-house insolvency practitioner came back with this:

'The important thing seems to be that surplus funds should not be actively invested, as this might change the company from being a trading company to an investment company, which would get rid of the ER. But simply leaving the funds in the bank, even on deposit earning interest, would not amount to an investment activity, so that would be safe.'

[badgernumber1]

P.S. Understand you (OP) may be concerned about tax on MVL distributions once the new legislation is enacted.

The draft legislation makes it clear that 'phoenixing' will be targeted - this would endanger a claim for ER if you were to close/re-start with a new company or take up as a sole trader in the same field within 2 years (hopefully not if you become a permie in same field).

Otherwise, re. the 'money-boxing' issue - seems there are no published proposals to address this. That's not to say there are no imminent related changes afoot(?)

So little clarity - we might have hoped for better by now but yesterday's budget report seems to say no more than that 'the government will respond to the consultation on company distributions in March 2016.'

Interested if anyone has a different view :-)

[ASB]

You should watch out for your accountant giving you duff advice when you ask them this question.

There do seem to be a number of instances of that. The key thing - from the financial perspective - would be to ensure that the bank account is closed and any rebates on VAT etc obtained before MVL'ing.