Many UK entrepreneurs may prefer to liquidate their companies in the next three months to escape the changes in the tax rules. According to advisers 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 or 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 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 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.
