Posted on 21 January 2016
Head of Business Recovery and Insolvency at Smith Cooper, Dean Nelson warns HMRC’s latest proposals will see the tax man take action against individuals who extract profits from a company by way of liquidating where HMRC consider the individual is trying to achieve capital gains tax treatment rather than paying income tax.
The liquidations as well as other forms of corporate restructuring could see taxpayers potentially exposed to tax rates as high as 38.1 per cent from April.
The crackdown comes four years after a £25,000 cap was put on the amount that could be deemed a capital gain under an “informal” striking off procedure which boosted and almost doubled the number of members’ voluntary liquidations since 2010.
Dean Nelson warns that the changes could be a “nasty shock” for those who are unaware of these potential changes.
Dean comments: "Rolling up distributable profits into capital gains on shares has been standard planning for a while and generally not considered a 'tax planning' technique. The fact that HMRC are suddenly focusing on this further highlights the increasing difference in tax rates between income tax and capital gains tax which has already been stretched by the availability of the 10 per cent tax rate for those who qualify for entrepreneur’s relief."
HMRC expect the change to bring in £35m in 2017-18.
Dean added: “If enacted, the significant changes will be introduced from April this year, so any company currently considering liquidation should seek professional advice on whether they can potentially avoid falling within scope of these new rules by undertaking the wind-up before 5th April.”