by David Watkinson Watkinson Black
Many people operate their business through a limited company. Whilst one reason for choosing to do so is to reduce their tax liability, there are a large number of other reasons why they may wish to do so.
Last month we looked at the new rules regarding the taxation of dividends and possible ways in which the effects could be mitigated. However, whatever the reason was for operating through a company, these new rules could have a large effect on the proprietor’s taxation and net income. But there are further changes that could have an impact on the owner of a small limited company.
Proceeds from the disposal of shares is a capital receipt and subject to Capital Gains Tax. The rates of CGT are substantially lower than Income Tax especially if Entrepreneurs Relief is available, which it would generally be to a small businessman. This difference will be even greater after April when the new dividend rules come into play. It has always been the case that the final transfer of funds from the company to the shareholder when the company is dissolved is taxed as the proceeds of disposal of the shares rather than a distribution, and therefore enjoying the more favourable tax rate.
The Finance Bill 2016 introduces measures that change this treatment in certain circumstances and which will mean that large cash sums taken on the winding up of a company may be liable to Income Tax rather than the more favourable Capital Gains Tax. This change will apply if after receiving the payment the shareholder is involved in a similar trade within 2 years. The abuse that this measure is intended to counter is where someone retains cash within the company, liquidates the company which then distributes the cash, and the recipient subsequently sets up a new company and repeats the process. Many people would not necessarily disagree with this. However, not only are there many commercial reasons that may explain this sequence, but also the government is looking to widen the impact, and it is this potential wider impact that is most worrying.
However, it is not all bad news. Rumours were rife before Christmas that the government intended to introduce measures to force contractors to be put on a client’s payroll if they were working for the same client for more than a month. This first appeared in a couple of newspapers, and caused such consternation that an online petition to parliament was raised. The good news is that no such measure appears in the Finance Bill. But there is never smoke without fire, so keep watching this space!
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
