Tax rule change triggers surge in liquidations

A record number of solvent companies were wound-up in March, as company directors moved to exit before rules with the potential to land them with much higher tax bills came into force.

The exodus relates to April 6th, as from then winding up directors can no longer claim Entrepreneurs’ Relief on CGT due on any gains if they stay in the same trade for two years.  

The change is designed to stop people avoiding tax by ‘storing up’ profits in one company, winding it up and paying less CGT (just 10% with ER) before starting-up a new company.

It explains why there were 2,663 solvent liquidations in March, over two-and-a-half times more than the previous record of 992 in April 2015, show figures seen by R3, an insolvency body.

“The scale of the spike in solvent liquidations is a surprise,” said the body, which pointed out that the monthly average for the 12 months prior to March 2016 was just 768.

“We expected there to be an increase as the clock counted down, but not one as big as this. There will have been a mixture of different types of companies being liquidated, including those companies owned by those targeted by the rule.”

However, R3’s president Andrew Tate said some genuine entrepreneurs might have had to accelerate their retirement plans to avoid being hit by the tax change.

“Very often, retiring entrepreneurs who are winding up their company but selling or passing on their business will have to stay involved for a while to make the handover easier,” he said.

“Their presence as a consultant might be reassuring for customers, for example. Obviously, this means they have to stay involved in the same line of work within the two-year timeframe.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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