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Business Services  •  Business Tax  •  Entrepreneur's Relief  •  Personal tax  •  Small Business  •  Tax Planning  •  Tax Relief

Tax consultation: Changes to the taxation of company funds – ‘money boxing’

By Lesley Stalker on 13 January 2016

Additional changes to the taxation of company funds in certain circumstances are due to be introduced from 6 April 2016. These changes will have an impact on shareholders of a company that retains profits in excess of the company’s commercial needs and then receives the profits as capital.

Unlike the ‘Phoenix Trades’ legislation (read our other blog), these changes are under consultation until 3 February 2016 and few details are currently available, although the areas likely to be targeted are known. The new legislation is expected to be incorporated into Finance Act 2016, effective from 6 April 2016; in the meantime, this blog looks at the areas which are likely to be targeted.

The treasury takes the view that the increase in tax on dividends, coupled with the low rate of capital gains tax which applies with the benefit of entrepreneurs’ relief, are likely to increase the incentive for shareholders to extract funds from companies as capital rather than income. The proposals for tighter legislation are designed to ensure this doesn’t happen.

Extraction of funds that are likely to be affected include capital reductions, voluntary liquidations, company purchase of own shares, even some company sales after 5 April 2016 may have radically different consequences to the same transaction undertaken before 6 April 2016.

  • Capital reductions – currently a reduction of capital by the repayment of share capital or share premium to shareholders is not a distribution by the company under general principles, and is therefore not a dividend in the shareholder’s hands. It can be treated as a capital transaction subject to capital gains tax and, where applicable, entrepreneurs’ relief.
  • Members’ voluntary liquidation – currently distributions made by a liquidator in such circumstances are not income distributions by the company, but are treated as capital in the shareholders’ hands.

The only exception to the above currently is if HMRC can use the general anti avoidance rules to reclassify payments made as income.

From 6 April 2016, capital reductions and members’ voluntary liquidations will be explicitly included within the remit of the existing anti-avoidance rules and further Targeted Anti-Avoidance Rules (TAAR) will be introduced to target members’ voluntary liquidations.

For capital reductions, the extension of the existing rules will generally make it much more difficult to claim entrepreneurs’ relief on a repayment of share capital or share premium.

For members’ voluntary liquidations, the combination of the TAAR and the extension of the existing rules will make it much more difficult to claim entrepreneurs’ relief unless the shareholders are no longer going to be involved in business activities going forward.

A specific example would be property developers who set up separate companies for each development and then liquidate once each project has been completed.

  • Company purchase of own shares – currently unquoted companies can purchase their own shares from shareholders who are exiting from the business and, subject to certain conditions, the shareholder can pay capital gains tax and claim entrepreneurs’ relief on the cash they receive. The consultation process specifically focuses on this and suggests changes will be introduced.
  • Money boxing – The consultation expresses concern that profits may be ‘money-boxed’ rather than distributed to shareholders, but offers no suggestion as to what may be done to tackle this. However it is clearly on the radar and changes may be afoot.

Although the legislation will not be available until the consultation period has expired, companies only have until 5 April 2016 to prepare for the above changes and complete any required tax planning in order to be certain about the future tax treatment. If you wish to discuss the impact of these changes please contact Lesley Stalker las@rjp.co.uk.

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Additional changes to the taxation of company funds in certain circumstances are due to be introduced from 6 April 2016. These changes will have an impact on shareholders of a company that retains profits in excess of the company’s commercial needs and then receives the profits as capital.

Unlike the ‘Phoenix Trades’ legislation (read our other blog), these changes are under consultation until 3 February 2016 and few details are currently available, although the areas likely to be targeted are known. The new legislation is expected to be incorporated into Finance Act 2016, effective from 6 April 2016; in the meantime, this blog looks at the areas which are likely to be targeted.

The treasury takes the view that the increase in tax on dividends, coupled with the low rate of capital gains tax which applies with the benefit of entrepreneurs’ relief, are likely to increase the incentive for shareholders to extract funds from companies as capital rather than income. The proposals for tighter legislation are designed to ensure this doesn’t happen.

Extraction of funds that are likely to be affected include capital reductions, voluntary liquidations, company purchase of own shares, even some company sales after 5 April 2016 may have radically different consequences to the same transaction undertaken before 6 April 2016.

  • Capital reductions – currently a reduction of capital by the repayment of share capital or share premium to shareholders is not a distribution by the company under general principles, and is therefore not a dividend in the shareholder’s hands. It can be treated as a capital transaction subject to capital gains tax and, where applicable, entrepreneurs’ relief.
  • Members’ voluntary liquidation – currently distributions made by a liquidator in such circumstances are not income distributions by the company, but are treated as capital in the shareholders’ hands.

The only exception to the above currently is if HMRC can use the general anti avoidance rules to reclassify payments made as income.

From 6 April 2016, capital reductions and members’ voluntary liquidations will be explicitly included within the remit of the existing anti-avoidance rules and further Targeted Anti-Avoidance Rules (TAAR) will be introduced to target members’ voluntary liquidations.

For capital reductions, the extension of the existing rules will generally make it much more difficult to claim entrepreneurs’ relief on a repayment of share capital or share premium.

For members’ voluntary liquidations, the combination of the TAAR and the extension of the existing rules will make it much more difficult to claim entrepreneurs’ relief unless the shareholders are no longer going to be involved in business activities going forward.

A specific example would be property developers who set up separate companies for each development and then liquidate once each project has been completed.

  • Company purchase of own shares – currently unquoted companies can purchase their own shares from shareholders who are exiting from the business and, subject to certain conditions, the shareholder can pay capital gains tax and claim entrepreneurs’ relief on the cash they receive. The consultation process specifically focuses on this and suggests changes will be introduced.
  • Money boxing – The consultation expresses concern that profits may be ‘money-boxed’ rather than distributed to shareholders, but offers no suggestion as to what may be done to tackle this. However it is clearly on the radar and changes may be afoot.

Although the legislation will not be available until the consultation period has expired, companies only have until 5 April 2016 to prepare for the above changes and complete any required tax planning in order to be certain about the future tax treatment. If you wish to discuss the impact of these changes please contact Lesley Stalker las@rjp.co.uk.