Entepreneur's Relief if turning permanent

[zafoeta]

Hi

I have been researching some bits around Entrepreneur Relief. Basically I accumulated around 300-400k in my ltd (sole director), and would have the option to go permanent.
A few months back my accountant suggested that if I go permanent performing a job in similar nature (I am software engineer) I wouldn't be able to claim Entrepreneur's Relief. However, when reading a few posts on this forum, I read the contrary that I would be able to take Entrepeneur's Relief perfectly legally and no issues.
Can anyone suggest what is actually true and possibly point to legislation online (can't really find anything specific to contractors on HMRC websites)?

Thanks

[Craig@Clarity]

Hi zafoeta,

I think your accountant may not have given you a full explanation or we're not sure of the complete facts here. Assuming you meet all the criteria of being eligible for ER (sufficient shareholding, trading for long enough etc etc.), you're going permanent for the foreseeable future to work for an unconnected person, you're not closing the company and starting a new one (phoenixism) it to do exactly the same thing as you were before and you're not doing it for the avoidance or reduction of a charge to Income Tax, then you should be fine. Phew!

With that amount of profit in the company, I'd perhaps speak to Chris Maslin and potentially going down the MVL route. He's on here.

[PhiltheGreek]

(phoenixism)

Discrimination against phoenixes?

[Maslins]

HMRC confirmed that changing from running a company doing X to a permanent employed role doing X would not breach those rules, subject to the caveat that you're not closely related to those running the company where you'd be permanently employed. Ie you should be safe for it to remain a capital gain, rather than be recategorised as dividends. Entrepreneurs relief is totally separate to this, and can only apply if it is a capital gain.

I can't recall where I got it from, but I've got a PDF saved our end relating to clearance requests for this kind of situation. It basically says HMRC aren't offering them, but then offers some clarity of the rules. I've pasted a bit of it below, my bold at the end:

"Condition C is that the individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution. Trade or activity is not defined, and is therefore to be interpreted widely as anything done by the company. Condition C goes on to set out the way in which the individual would be viewed as continuing the trade or activity It will include as a sole trader, through a partnership, through another company, and through connection to the company of an associate. Any connection to the same or a similar activity will suffice which will include, for example, working as an employee for a spouse in a similar trade. Condition C will not be met where the individual is employed by an unconnected third party."

So as long as the permanent role isn't with a company where you're closely related to those involved, you'll be fine.

I did a bit of Googling/searching on the gov.uk site to see if I could find a link to point you to, but couldn't find anything as clear as the above. Lots of examples where someone would/wouldn't be caught, but not specific to what you're suggesting.

[Ranso]

So as long as the permanent role isn't with a company where you're closely related to those involved, you'll be fine.

Hi Maslins,

I'm going perm in the same role I've been doing for the last 2 years, with the same end client (a bank). When contracting I was employed by my Ltd, which had a contract with a service provider (Hays), who outsourced me to the end client. Now, as a permie, I am directly employed by the same end client.

I am not 'closely related' in a personal sense with those involved, could I still qualify for ER?

Thanks!

[Maslins]

I'm going perm in the same role I've been doing for the last 2 years, with the same end client (a bank). When contracting I was employed by my Ltd, which had a contract with a service provider (Hays), who outsourced me to the end client. Now, as a permie, I am directly employed by the same end client.

I am not 'closely related' in a personal sense with those involved, could I still qualify for ER?

As above, forget about ER, this is about whether the distributions are taxed as CGT or dividends.

When they're talking about connected, they mean personally. I anticipate it's there to cover convoluted situations that inevitably some chumps would try to exploit.

Eg two brothers Bro1 and Bro2 each trade via their own companies. They then both close. They both then set up new companies, but with Bro1 working for Bro2's company, and vice versa.

Or perhaps husband owns a company that he liquidates. Wife then sets up a new company doing the same thing, with husband as the sole employee and sole individual doing the work.

[northernladuk]

Hi Maslins,

I'm going perm in the same role I've been doing for the last 2 years, with the same end client (a bank). When contracting I was employed by my Ltd, which had a contract with a service provider (Hays), who outsourced me to the end client. Now, as a permie, I am directly employed by the same end client.

I am not 'closely related' in a personal sense with those involved, could I still qualify for ER?

Thanks!

Hope you are going to keep your IR35 insurances running for a full year after you go perm!

[zafoeta]

I can't recall where I got it from, but I've got a PDF saved our end relating to clearance requests for this kind of situation. It basically says HMRC aren't offering them, but then offers some clarity of the rules. I've pasted a bit of it below, my bold at the end:

"Condition C is that the individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution. Trade or activity is not defined, and is therefore to be interpreted widely as anything done by the company. Condition C goes on to set out the way in which the individual would be viewed as continuing the trade or activity It will include as a sole trader, through a partnership, through another company, and through connection to the company of an associate. Any connection to the same or a similar activity will suffice which will include, for example, working as an employee for a spouse in a similar trade. Condition C will not be met where the individual is employed by an unconnected third party."

Thanks for replying with such detail.
I finally also found some HMRC literature to read. Would you mind sharing where HMRC actually confirmed this?
I find this paragraph quite concerning on HMRC tax link CTM36320 - Company Taxation Manual - HMRC internal manual - GOV.UK

Condition C is met not only where a new company is created after the winding up of the company in question – it will apply wherever the individual receiving the distribution continues to carry on, directly or indirectly, the same or a similar activity.

So this phrasing is quite different from above, it's a lot more general and there is no mentioning of being closely related to the person running the company.

On the other hand the examples on the next page (CTM36325 - Company Taxation Manual - HMRC internal manual - GOV.UK) never mention any person shutting down a company and then joining a company that is completely unrelated to a connected person; which again seems to leave the interpretation a bit open, and could almost indicate it's like you describe it.

Again - I am left in doubt, and by no means would I like to take any risk on this, as much as I would like to potentially extract cash immediately, I could as well invest the money within the company for years to come, and later on withdraw it slowly as salary/dividends.

Any more further thoughts??

[zafoeta]

Thanks for replying with such detail.
I finally also found some HMRC literature to read. Would you mind sharing where HMRC actually confirmed this?
I find this paragraph quite concerning on HMRC tax link CTM36320 - Company Taxation Manual - HMRC internal manual - GOV.UK

So this phrasing is quite different from above, it's a lot more general and there is no mentioning of being closely related to the person running the company.

On the other hand the examples on the next page (CTM36325 - Company Taxation Manual - HMRC internal manual - GOV.UK) never mention any person shutting down a company and then joining a company that is completely unrelated to a connected person; which again seems to leave the interpretation a bit open, and could almost indicate it's like you describe it.

Again - I am left in doubt, and by no means would I like to take any risk on this, as much as I would like to potentially extract cash immediately, I could as well invest the money within the company for years to come, and later on withdraw it slowly as salary/dividends.

Any more further thoughts??

Reading further actually, I found the actual legislation online. I think you are right after all, that the key point is that this affects going permanent to a company that I would be "connected to".
Finance Act 2016

The legislation seems pretty clear cut actually (unlike the watered down versions on HRMC website).

[WordIsBond]

Would you mind sharing where HMRC actually confirmed this?

I think you missed this :

I can't recall where I got it from, but I've got a PDF saved our end relating to clearance requests for this kind of situation.