Business Asset Disposal Relief: what the new Entrepreneurs' Relief means for limited company contractors
A few mentions of Business Asset Disposal Relief on ContractorUK, notably back in July but as recently as this month, yet not much by way of an explanation, despite it being a major consideration for limited company contractors who close because it’s the new Entrepreneurs’ Relief, writes John Bell, the director of insolvency firm Clarke Bell.
Why have we got BADR?
In fact, in March, the government introduced Business Asset Disposal Relief (BADR) to replace what was formerly known as Entrepreneurs’ Relief, which was conceived as a tax relief available to shareholders selling shares and to business-owners selling business assets.
In its new guise, which some might refer to as a political ‘rebranding’, it has been significantly scaled back, as the government (and specifically the chancellor), has seemingly listened to dissenting voices saying that ER was ‘expensive, ineffective and unfair’ – mainly due to the fact that around three quarters of the relief was benefitting just 5,000 people.
In his March 2020 Budget, Rishi Sunak said that 80% of small businesses would be unaffected by the rebranding – sorry, reform, and that it would save the Treasury £6billion over the coming 5 years.
We now know (almost) for certain that the Off-Payroll legislation (which reforms IR35) will be rolled out into the private sector from April next year. This means that many contractors working through a limited company, also known as a Personal Service Company (PSC), will be considering their options for the future. Further, many of those will be exploring winding up their PSC to pursue alternative paths – such as a PAYE role, or even retirement.
Not all chancellors agree
Interestingly, ER, now known as BADR, was originally introduced by Labour chancellor Alistair Darling as a benefit for entrepreneurs who invested in and grew their business. It was considered to be a justifiable reward for all the risks they had taken in running their own business. It allowed business-owners to pay a reduced 10% rate of capital gains tax on any profits they made when selling their business, instead of the typical 20% up to a lifetime limit of £10 million.
However, following the current chancellor’s announcement in March this year, the lifetime tax allowance for claiming this tax relief was reduced to £1 million. This move, which some might see as a sudden tax grab, will impact those company directors who had perhaps been relying on their limited company for their pension.
A perfectly taxing storm
The background noise also sounds taxing. In particular, there is ongoing talk about the equalisation of income tax and capital gains tax, which would further impact limited company directors -- perhaps the beneficial rate of 10% is to be abolished completely or the surplus above £1 million will now be taxed not as capital gains tax but at income tax rates, so the speculators say. One way or another, Mr Sunak has set his sights on getting business-people’s hard-earned money into the Treasury’s coffers.
These potential tax changes, combined with the impact of the incoming IR35 off-payroll rules, mean that any contractor looking to close their company soon would be wise to press on with their plans now – before this combo hits.
If bottom-line is your priority, the best course of action for many limited company contractors will be to close down their company with a Members’ Voluntary Liquidation (MVL) - typically when the amount of assets in the company (including cash-at-bank and any overdrawn director’s loan account) is over £25,000. If the assets are below that level, then an informal winding down procedure is likely to be the better option.
Words of advice
My advice to any contractor who is considering closing their company is to talk to your accountant. They will be able to advise you as to which option is better for you and the most tax-effective. If the best option is to place your company into MVL, you will have to appoint an insolvency practitioner to liquidate your company.
Currently, business owners can claim BADR relief on capital distributions to shareholders when the company is closed down. By closing down a company with an MVL and taking all the remaining money in the business bank account as a capital distribution rather than a business dividend, you can make huge savings in tax under the BADR scheme.
While the name of the tax relief available has changed from Entrepreneurs’ Relief to Business Asset Disposal Relief -- and the amount you can claim is now £1 million, it does still offer considerable tax advantages. In the current climate where HMRC and its masters are looking for revenues wherever they might be found, it remains to be seen how long this will remain the case.