anti-phoenix rule query

[jmann]

I am looking to enter a new market in the same field as my current business. I am trying to figure out what's the best way to do this. I could use my existing company but I want to set up new company and keep everything separate. I am doing this to target business customers where profit margin is better.

My question is whether I can still claim entrepreneurs' relief if I decide to close one of the company in a few years time. Since both companies are in the same field, would anti-phoenix rule come into play?

[Maslins]

I would certainly expect the anti avoidance rules would catch this, yes.

I imagine you'd need to move to a trade far more different to the previous one than your situation to be able to have a new company immediately after the old one and not be caught.

[Craig@Clarity]

Agree with Chris. It's likely to be caught so ER wouldn't be granted. What if instead, instead of closing the first company, you simply drew down on your surplus profit whilst taking nothing from company 2. Alternatively, why not use your existing company for both income streams but have a different "trading as" for your new venture. You could open a separate company bank account with the "trading as" name etc.

Also, if you set up a company doing the same thing under the same ownership you'll have to bear in mind VAT too, meaning you'll have to register the new company for VAT regardless even of if it doesn't hit the threshold

[jmann]

I would certainly expect the anti avoidance rules would catch this, yes.

I imagine you'd need to move to a trade far more different to the previous one than your situation to be able to have a new company immediately after the old one and not be caught.

Both companies are going to be running simultaneously for few number of years. It's not like I am closing the company and opening new one. Would this still fall under anti-phoenix rule?

[jmann]

Agree with Chris. It's likely to be caught so ER wouldn't be granted. What if instead, instead of closing the first company, you simply drew down on your surplus profit whilst taking nothing from company 2. Alternatively, why not use your existing company for both income streams but have a different "trading as" for your new venture. You could open a separate company bank account with the "trading as" name etc.

Also, if you set up a company doing the same thing under the same ownership you'll have to bear in mind VAT too, meaning you'll have to register the new company for VAT regardless even of if it doesn't hit the threshold

My concern was if I use trading as, companies would look at the pricing on my other company site which is going to be much less than what I charge business customers. I am already VAT registered so its not a big deal. Maybe I am overthinking this.

[Maslins]

Both companies are going to be running simultaneously for few number of years. It's not like I am closing the company and opening new one. Would this still fall under anti-phoenix rule?

You'd basically need to be able to justify a (non tax) reason why it made sense to use a new company, rather than run it all through the old one. I know you touched on this in your opening paragraph, but personally I don't think those are good enough reasons.

Also be aware if you did press ahead with this and were caught, it's not that you don't get entrepreneurs relief, it's that it wouldn't be taxed as a capital gain at all (it would be taxed as dividends).

[jmann]

You'd basically need to be able to justify a (non tax) reason why it made sense to use a new company, rather than run it all through the old one. I know you touched on this in your opening paragraph, but personally I don't think those are good enough reasons.

Also be aware if you did press ahead with this and were caught, it's not that you don't get entrepreneurs relief, it's that it wouldn't be taxed as a capital gain at all (it would be taxed as dividends).

I ran this past my accountant and he said the same thing as you. He had the same concern. I thought it shouldn't be a major issue since I am targeting different market within the same field. I know major players are doing the same thing but under group structure.

To be honest, main reason for separate company is to avoid any legal issues which could arise from dealing with large businesses. Their payment terms will vary which can affect cash flow. If this model fails, I can safely close the company without affecting the other one.

[Craig@Clarity]

My concern was if I use trading as, companies would look at the pricing on my other company site which is going to be much less than what I charge business customers. I am already VAT registered so its not a big deal. Maybe I am overthinking this.

If you had 2 separate companies, they'd still look at your other company site and look at pricing right? What I'm suggesting is that you have ABC Ltd as your original company. Your new income stream business could then simply be marketed as "Jmann Business Customers" with the footer on your website and on letter head as "ABC Ltd t/a Jmann Business Customers". However, as you've mentioned, if you're not looking to close down company 2 then there is no issue with setting up a new company to segregate this. You'll just have to register for VAT (assuming same ownership and business activity) and consider ER won't be available. You'll also have twice the costs and admin though but your accountant could hopefully do a deal with you