With personal tax rates running up to 45% (or 47% if you include National Insurance Contributions) and a Corporation Tax rate at a flat 19% (and set to drop to 17% next year), conducting a business through a company can look like a no-brainer.
The fly in the ointment is that if you want to extract profits from the company for your personal enjoyment and consumption, there will be tax consequences (unless you are willing to take the “nuclear option” of becoming non-resident for a significant period – but that’s another discussion for another day).
The holy grail is to get the money out of the company and into your hands tax-free. Forget it: there are still snake-oil salesmen out there who will promise (for a fat fee, of course) to show you the way to do it, but our advice is to give them a wide berth.
The next-best thing to no tax is Capital Gains Tax – tax at 20% or, to the extent that you can claim Entrepreneurs’ Relief, 10%.
In the past, it’s sometimes been possible to achieve this by dint of “phoenixism”. The general idea was that you left cash to accumulate in your company for few years, at the end of which period you liquidated it and distributed the cash (giving rise to favourably-taxed capital gain) and then started again with the intention of repeating the cycle every few years. Of course, there were some obvious commercial, practical and presentational difficulties in liquidating your company every few years which limited the application of this sort of planning to particular cases; and the favourable tax treatment couldn’t always be guaranteed: but in principle it was worth looking at in appropriate situations.
In 2016 HMRC strengthened the legislation around “phoenixism”. The new rules say, very broadly, that you don’t get the favourable tax treatment on liquidation if, within two years of getting your money out, you are involved in carrying on an activity which is the same as that which the liquidated company carried on or even one that is “similar” to it. One problem is that the legislation is very widely drafted. It’s not easy to see, in marginal cases, exactly where its limits lie and – because it is anti-avoidance legislation – HMRC have resolutely set their face against giving any advance clearances. There is a let-out where there is no tax avoidance purpose involved: where, for example you shut up shop and retire, intending the retirement to be permanent, but subsequently start up again following an unexpected change of circumstances; but generally it is still too soon to know how aggressively HMRC will utilise their new tool.
Recognising that the legislation specifically and expressly refers to distributions in a winding-up, there has been a view that planning could be put into place based around a sale. Thus, having left cash to accumulate within your company you might (instead of liquidating it and starting again) sell it for cash (usually to the tax scheme promoter or an associated company who would extract the cash in a tax-efficient way). This would, so ran the argument, give rise to a capital gain on disposal which was not within the scope of the “phoenixism” rules.
HMRC are unimpressed. Earlier this year they published their views on what they describe as “schemes that claim to avoid the Income Tax charge for shareholders when winding up a company”.
The technical justification for HMRC’s position is, in our view, somewhat shaky: after all, if Parliament chose (as it did) to enact legislation dealing specifically with “distributions in a winding-up”, it requires something by way of logical gymnastics to suppose that Parliament intended it also to apply to a sale of shares where no winding-up ever takes place. Nonetheless, HMRC’s view is what it is: they consider that the arrangements to sidestep the new rules and to “extract” value by way of sale may be caught either by the new rules or by the General Anti-Abuse Rule (“GAAR”).
There is no suggestion that HMRC would, at least under the law as it now stands, seek to challenge the availability of capital gains treatment (including Entrepreneurs’ Relief if appropriate) on a genuine sale of shares in a company to a purchaser intending to continue running the business. There was, at the time at which the new rules were being discussed, some suggestion that leaving cash undistributed in a company so as to achieve a higher sale price (what HMRC style “money-boxing”) might be offensive and something that HMRC might want to counter by a change of law. But in the event no such change eventuated so, for the time being at least, there should be no problem with a “genuine” sale.
For more information, please get in touch with your usual BKL contact or use our enquiry form.