We are now within 6 weeks (and possibly less) of some excellent tax opportunities being significantly curtailed. Clients may want to make hay while the sun shines but the clock is ticking. It has taken the 2016/2017 potential gulf between capital gains tax (10%) and income tax (38.1%) of 28.1% to get the Government to introduce rules which properly limit opportunities to extract company funds as capital and these rules come in from 6 April 2016.
The beauty of an MVL is that it allows clients to extract cash and other assets from a company as capital rather than dividends. If Entrepreneurs’ Relief (ER) applies then this means that the extraction will be taxed at 10% rather than an effective dividend rate of up to 30.56% (2015/2016 rates).
HMRC are concerned that that some shareholders are taking advantage of these rules by ‘phoenixing’ which means that they are liquidating a company and then popping up again in a similar form soon after. After 5 April if they ‘pop up’ again within 2 years of a liquidation distribution then the distribution will be deemed to be a dividend and taxed as such.
HMRC would argue that ‘transactions in securities legislation’ (TISL) enable them to achieve the same result as the new legislation now but most technical commentary and case law does not support them on this view. Even if their view were correct (unusually) the onus is completely on HMRC to enforce this legislation using a rather archaic set of rules.
Many companies have significant share capital, perhaps as a result of a previous group reorganisation. Opportunities still exist to extract cash or other assets at 10% by reducing this capital and paying tax at only 10% where ER applies. Again HMRC only have TISL in their armoury to counter this kind of transaction – and in most cases this legislation should be ineffective.
Again the party will be coming to an end on 6 April 2016 when amendments are made to TISL which will often have the effect of treating the proceeds of a capital reduction as a dividend. Furthermore these rules will be brought within self-assessment which will shift the onus of reporting back to the taxpayer – along with the risk of penalties for getting it wrong.
Clients should move very fast if they are not already doing so. Although 5 April is currently the deadline for ‘banking’ some ER there is some speculation that the 16 March Budget may introduce ‘anti forestalling measures’ to make much planning ineffective from 15 March 2016.
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