What’s happening about ‘money-boxing’?

Over the past year there has been a wholesale HMRC raid on opportunities to extract company funds as capital. This is not surprising as we move into an era where dividends will be taxed at a top rate of 38.1% and the Entrepreneurs’ Relief rate remains at 10%.  Some of the new rules to come in from 6 April 2016 are as follows:

  1. Far less scope to extract funds from holding companies through capital reductions. This is because these kinds of transaction will be put squarely within the scope of transactions in securities legislation and many capital reductions will now be taxable as dividends.
  1. Liquidations will generally only work to extract funds as capital when the shareholder ceases involvement in the business. Any involvement within 2 years of a liquidation distribution will mean that the distribution will be taxable as a dividend rather than capital.

But what about ‘money-boxing’? Legislation against this has been conspicuous by its absence. One key problem area identified in the recent consultation was sales of companies with retained profits: where a shareholder sells shares in a company which has retained profits that could have been distributed to the shareholder by way of dividend. This is the only area which has not been specifically hit by the recent attacks. However, it seems unlikely that some kind of attack will not be made over the next year. This is because the other measures are likely to increase the practice of ‘money-boxing’ by making it harder to extract funds as capital.

What next?

The consultation document asks whether consideration should be given to the introduction of a rule under which the profits of close companies are apportioned to their participators and taxed as income. Similar rules existed in the 1970s and 1980s. This would be quite draconian but would undoubtedly erode any advantages associated with ‘money-boxing’.

Another possibility may be that an allowance of distributable reserves is introduced which can be treated as capital in the event of a sale – with anything else being taxed as a distribution. This would have the advantage of simplicity but it would fail to recognise the fact that companies reinvest their profits in expanding the business and cannot always simply pay out their reserves. There would probably have to be  more complex rules that limit any restriction to ‘excess cash’ not being used by the company (and loans that have already been made to shareholders), but even this is a subjective area.

The consultation document makes it quite clear that no decision has yet been taken and this is probably due to the complexities associated with the options mentioned above. Therefore it is probably a case of watch this space…

 

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