Reviewed: 9th February 2016
The impending changes to the taxation of dividends for entrepreneurs and small business owners have instigated a rise in the number of solvent liquidations early this year – and the trend is expected to continue in the coming months.
If the proposed changes go ahead on 6 April 2016, it will be more expensive for individual shareholders to accumulate and extract surplus cash funds or profits from their companies.
Currently, surplus funds distributed through a Members’ Voluntary Liquidation are treated as capital distributions and, providing certain conditions are met, the shareholders have the benefit of Entrepreneurs' Relief which reduces the tax rate to 10%.
Under the proposed changes, such distributions may be subject to Income Tax, which could have the effect of tripling the tax bill for the shareholders.
HM Revenue & Customs will also be looking more closely at the commercial purpose for winding up a company, particularly if a new company is set up to replace it within two years.
It has been suggested that property developers and those who own numerous different businesses could be most notably affected by the rule changes that were revealed in a consultation document published in December.
However, many of those who do become aware of the incoming changes, which could soon see entrepreneurs exposed to tax rates as high as 38.1 per cent, are expected to take up the option of liquidating companies they own over the next few months.
Andrew Tate, vice-president of the Business Recovery Professionals trade organisation, has said that he expects the tightening of tax laws in this context to result in a “great increase in liquidations” in the Q1 2016.
Spokespersons for several organisations have suggested that the new rules will have consequences that are ultimately a concern for directors operating in the UK.
But HMRC has been keen to make clear that the intended aim of the rule changes is to incentivise entrepreneurs to arrange returns from their companies as capital rather than as income.
As well as a sharp rise in voluntary liquidation cases, HMRC’s rule changes are expected to result in an unusually high number of dividend payouts being initiated in the weeks and months prior to April 6th.
If you have any clients who could potentially be affected by the proposed changes, then they will need to act quickly to receive the benefits currently available. We would be more than happy to discuss the above either with yourself or your client direct, free of charge.
Our extensive office network comprises 55 offices across the UK with a partner-led service offering immediate director advice. If you would like any further information and advice on the proposed tax changes or solvent liquidations, please do not hesitate to contact us.
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