Budget day has been set for 11 March and as is always the case, the rumours, speculations and hearsay’s have begun.
It has been reported that Boris Johnson said ‘I have to tell you the Treasury is fulminating against [CGT entrepreneurs’ relief] because there are some people who are staggeringly rich who are using that relief to make themselves even more staggeringly rich.’
A senior cabinet minister has claimed the Javid will ‘re-calibrate’ entrepreneur’s relief following criticism that the tax break benefits wealthy investors more than start-ups.
And I have read an article urging business owners to act quick!
More recently, in the Sunday Times, an article stated that Sajid Javid, is now considering rowing back on plans to remove entrepreneurs’ relief after an outcry from company founders who were relying on the tax break for their retirement.
What is CGT entrepreneurs’ relief?
Entrepreneurs Relief gives individuals the opportunity to use a 10% tax rate on all funds received from selling shares in their business or extracting all retained funds from their business upon liquidation, provided the qualifying conditions are met. To be eligible, broadly speaking you must have traded through your company for more than two years, whilst also being a Director, and at least a 5% Shareholder.
What is changing?
Good question. The nature of the impending changes, or even if the relief will be axed, is still unknown. It is possible that the relief will stay and just be watered down a little (which will impact staggeringly rich folk and not so many our clients), but no one knows for sure. It is also not known when these changes, if any, will take effect though it’s unlikely any changes will come into effect on the day they are announced. We will obviously be paying attention on 11 March and keep all clients abreast of any changes that take effect.
Below are some points to consider in the meantime, after all failing to plan is planning to fail.
1. If you choose to close down your limited company, and extract your final funds as a capital gain to utilise the entrepreneurs relief (whether by liquidating with Companies House or using a members voluntary liquidation) — you may be limited to not opening another company to perform the same work for 2 years (without suffering a one-off tax bill).
This is because from 6 April 2016 a Targeted Anti-Avoidance Rule (TAAR) specifically targets the practice of ‘phoenixing’ a company using liquidation in order to avoid income tax by converting income to capital gains. Phoenixing describes closing down a company and then continuing to be involved with a similar trade whether carried on by you or by connected parties.
If you open another limited company and do work that is similar to the original company, and if the HMRC deem this to be phoenixing, your final distribution of retained funds that you extract will be taxed as though it were income, and you will possibly face penalty charges.
This point needs to be kept in mind with regards to closing your limited company should you be caught under blanket IR35 rulings made by your end client too. It may be the case that many blanket decisions are put forward and then when the dust settles, contractor roles become available again once the larger companies assess the impact of the loss in their temporary workforce. If you must move into a PAYE job, or PAYE umbrella role, then we are recommending putting your company ‘On Hold’ with us and waiting it out before making the decision to close.
2. There are other options for either extracting funds from the limited company or utilising the funds in the company. These include;
· Drawing down on retained funds on an annual basis utilising the tax-free dividend allowance (£2,000 for dividends per shareholder for 2019/20)
· You can use the funds in the company to make investments in the company name — whether this be shares, property etc. Note, as the company would no longer be a trading company, you lose the ability to use entrepreneur’s relief (More an FYI than an issue given the above).
· Use your company to diversify and start a side business.
IR35 back in the headlines
There have been two recent updates that have come out:
1. The House of Lords’ Economic Affairs Committee will consider the impact of the rule change before it comes into force in April. Julie Kermode of the Freelance and Contractor Services Association has said: “The Treasury simply cannot deny the mounting evidence of the damage the off-payroll roll-out will do, with many contractors being laid off and with projects lost to other countries.”
2. As part of the review into changes to the rules, the HMRC has made an announcement to give business more time to prepare. Changes to the rules will only apply to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out.
The HMRC has also published a factsheet for contractors.
Once the 11th March budget has been announced we will review its impact for you and will send out a summary at that point. In meantime, nothing has been set in stone.