An imminent tightening of UK tax rules could see thousands of small business owners liquidate companies in the coming months, in an attempt to minimise tax liabilities.
According to the Financial Times, voluntary liquidation is seen as increasingly likely in order to pre-empt a government crackdown on income-into-capital tax planning and an increase in dividend taxation that could see tax bills triple for small firms.
This follows the publication of a consultation document late last year by HMRC in which proposals were laid out that would prevent individuals from misusing the Entrepreneurs’ Relief rate to extract money from ventures.
In last year’s Summer Budget, the government outlined measures to restrict the tax benefits of withdrawing capital from a business in the form of dividends.
Head of business tax at advisory firm Moore Stephens, Timothy Fussell, told the Financial Times that property developers and other serial entrepreneurs were most likely to be hit by the proposals. “It could be a nasty shock for someone who is unaware of these proposed changes,” he said.
However, tax partner at law firm Whittingham Riddell Duncan Montgomery thought that a rush of liquidations to pre-empt a crackdown was unlikely.
“If a business has reached the end of its life, or the trade has been sold, then perhaps liquidation offers a way through,” he said. “In those circumstances timing and proper paperwork are key to achieving the optimal rate of tax. But the dividend tax, if properly planned around does not have to be paid for most people.”
Introduced in April 2015, Entrepreneurs’ Relief offers entrepreneurs the chance to pay a far lower rate of capital gains tax when selling all or part of businesses. Instead of the normal capital gain rate of 18 or 28 per cent on qualifying assets, entrepreneurs pay a rate of ten per cent.
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