Why Entrepreneurs' Relief changes are the lesser concern
If the chancellor had a grand for every time contractors asked us in the past few months about whether Entrepreneurs’ Relief would make it unscathed out of his next Budget tomorrow, then he’d certainly leave the popular tax break entirely alone, writes Nick Hood of Opus Restructuring.
In fact, many contractors have heard rumours that the government intends to make changes to Entrepreneurs’ Relief (ER), which currently limits tax payable on capital gains. Unfortunately, the amendments that are actually proposed in this area of taxation go much further than just changing ER. These changes could have a majorly adverse impact on contractors who are operating via limited companies.
First, let’s take a step back. Just before Christmas 2015, the government published a consultation document outlining its plans to make radical changes to the taxation of distributions to shareholder individuals made through a Members Voluntary Liquidation (MVL). Their rationale is that it’s unfair that some people can arrange their affairs solely to take advantage of lower tax rates. Distributions to shareholders who are companies would not be affected.
The amendments are mainly focussed on “moneyboxing” and “phoenixism”. The first is where profits are allowed to accumulate in a company before being extracted in capital form by way of an MVL. 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 through an MVL.
The government plans to amend the Transactions in Securities legislation to treat both of these types of distribution as income rather than capital. For many contractors this will see tax rates increase from 10% (with Entrepreneur’s Relief) to 38.1% with the new 7.5% dividend surcharge. If that weren’t enough, the government is also threatening to introduce a new Targeted Anti-Avoidance Rule to prevent some distributions in a winding-up being taxed as capital, where the intention is to gain a tax advantage.
The consultation ended on February 3rd so the chance to object is over. We must now wait until the Budget on March 16th to find out whether these changes are to be implemented, and from when. All the betting is that it will happen and will take effect from April 6th. Why? Well, given the increasingly strident actions by HMRC on all aspects of tax avoidance, evasion and even mundane planning strategies, it’s hard to see why they would back down, especially as it will mean more tax revenues for them at a time when every tax pound counts.
Fortunately though, there’s still time to take action to avoid the higher tax by putting companies into an MVL and distributing funds to shareholders by close of business on April 5th – but not very much time, and lots of ducks need to be in a row. So contractors should consider taking professional advice immediately.
Despite these proposed tax changes, there remain substantial benefits from closing a company through an MVL. And what about ER? Well, Entrepreneurs’ Relief will still be available on a genuine cessation of business, such as going into employment. Yet do be aware contractors; you’ll need to note that you won’t be able to set up another company in the same business for two years without jeopardising your ER relief.