Having completed his dissertation, my youngest son has been lucky enough to be taken on five days a week by a local business. He commented recently that he was “saving furiously” but only because he had nothing to spend his money on! No holidays, out for dinner, off to the football or games of fives, and only able to drive five miles in his car. This apparent affluence is of course helped by living at home with mum and dad, all expenses paid!
As a result of Covid-19, many of us are experiencing drops in income but also expenses, and some business people will be wondering whether just to call it a day and not try to reopen or rebuild their businesses when we get back to normal. In addition, those individual contractors / consultants who will be impacted by the forthcoming IR35 legislation may also wish to close-down companies before this legislation finally comes into fruition.
While salaries and dividends can continue to be drawn from companies which have ceased to trade, it may be more tax efficient to put your company into members’ voluntary liquidation (MVL), and pay a one off Capital Gains Tax (CGT) bill rather than the generally higher rates of Income Tax which apply to salaries and dividends.
Capital gains are computed by deducting the cost of your shares (or 1982 value if higher) from the liquidation proceeds. Each shareholder is able to reduce their gain by an annual exemption of £12,300 (so £24,600 for a married couple if the each hold shares). The rate of CGT is generally 20%, but where your company is a trading company and not an investment company (which includes the renting of property), Business Assets Disposal Relief (Entrepreneurs Relief as was) can reduce this to 10% on up to £1 million of gains. If your business has already ceased trading then you have a three year period from the date of cessation of trade for your liquidation proceeds to be subject to the 10% rate.
Until recently, a number of company owners thought that it would be a good tax wheeze to operate say, a consultancy company for two or three years, put it into members’ voluntary liquidation and start up a new company shortly thereafter to basically carry on the same business. There is now anti avoidance legislation which can result in the MVL proceeds being subject to Income Tax as a dividend, taxable at up to 38.1%, in many situations if you are involved in a similar business within two years of the MVL so the CGT treatment is likely only to apply in genuine situations.
If you have a consultancy company, and are likely to be caught by the extension to the IR35 rules due to now come into effect from April 2021, you too should perhaps be thinking of an MVL if you are to become an employee of your client and your company will no longer be required.
|Click here to see John's profile and contact details.|
If you’d like to discuss further tax implications please contact John Cairns.
If you are thinking of closing down your business, please contact a member of our Business Restructuring team:
Whilst some of our staff are currently working from home, all of the above can be contacted on their email addresses or on 0141 221 2984.
They are there to help if you need it.
Other COVID-19 Information:
For all our help, support and information around COVID-19 / Coronavirus visit www.frenchduncan.co.uk/covid-19.
Here you can link to articles covering deferral of HMRC payments, new business rates & tax, business loans available (what we know so far, who will be eligible and how they might work), a 10 Step Guide to the Job Retention Scheme (plus a guide specific to holiday allowances within that) and even Top Tips on how to keep your personal finances healthy during this time.
We’ll keep these updated as things change, so remember to check back regularly. And we’ll be getting more written on other topics as soon as we can.
It’s just our way of trying to help.
French Duncan. #thepeopleforyou