UK entrepreneurs set to liquidate companies over tax rule changes

Thousands of entrepreneurs are expected to liquidate their companies over the next three months amid fears that an imminent tightening of the tax rules will more than triple their bills, reports the Financial Times.

Advisers said many small company owners were drawing up plans to lock in tax rates as low as 10 per cent when they extract profits from their business.

The liquidations — and certain other forms of corporate restructuring — would pre-empt a crackdown on income-into-capital tax planning and an increase in dividend taxation that would potentially expose them to rates as high as 38.1 per cent from April.

Andrew Tate, vice-president of the Association of Business Recovery Professionals, said the proposals, revealed in a consultation in December, were expected to trigger a “great increase in liquidations”.

Clive Stevens, executive chairman of Kreston Reeves, an accountancy firm, said there was a sense of urgency for affected individuals, who often ran consultancies or other personal service businesses. “They will have to act pretty quickly. Since just before Christmas our restructuring team have taken a lot of calls.”

Timothy Fussell, head of business tax at Moore Stephens, an advisory firm, said the proposals were likely to hit property developers and other serial entrepreneurs. “It could be a nasty shock for someone who is unaware of these proposed changes.”

Anita Monteith, of the Institute of Chartered Accountants in England and Wales, said the proposals would have unintended consequences, fuelling a perception the measures were “very anti-business”.

Revenue & Customs is taking action because higher dividend tax rates introduced in April will “increase the incentive to arrange for returns from a company to be taxed as capital rather than as income”. It expects the change to bring in £35m in 2017-18.

The increase in dividend tax rates — which is also likely to trigger big dividend payouts before April 6 — will widen the gulf between income and capital tax rates, which has already been stretched by the availability of the 10 per cent tax rate for those who qualify for entrepreneur’s relief (ER).

ER has cost billions of pounds more than originally expected, prompting criticism from MPs and speculation the government might crack down on it. But advisers said company owners should not face problems in claiming ER after April if they were liquidating an eligible company that was at the end of its life.

One target of the Revenue’s crackdown is “phoenixism”, where a company is liquidated and a new company set up to replace it. It wants to treat distributions as dividends if a shareholder becomes involved in a similar activity within two years.

It also intends to stop shareholders using companies as “money boxes”, by retaining more profits than are needed commercially before eventually taking out the profits as capital.

Tina Riches, a partner at Smith & Williamson, an advisory firm, said some owners would choose to accelerate sales or liquidations even if they did not end up being in the scope of the crackdown. “I think it’s as much the perception, the uncertainty and the possibility you might get caught if you change your plans.”

Advisers said that for simple businesses, such as consultancies, there was relatively little disruption in liquidating a company and establishing another one, beyond setting up bank accounts and re-registering with HMRC. But transferring a trading business to another vehicle was more complex.

The crackdown comes four years after the government put a £25,000 cap on the amount that could be deemed a capital gain under an “informal” striking off procedure. This boosted the number of “members’ voluntary liquidations” (MVL) — a method of liquidation used for solvent companies.

The number of MVLs has nearly doubled in the past five years to 7,200 in 2014-15, even though liquidations and insolvency proceedings as a whole fell over the period, according to Companies House.