This is a case study broadly based on an actual scenario we were asked to advise on.
Dave had been a financial consultant for many years operating through his limited company, Veda Ltd. As he had reached the age of 65 he decided to retire. With this in mind, he asked his accountant to prepare final accounts for the year ended 31 March 2022.
The final accounts showed a salary of £12,000 per annum and a dividend paid of £38,000. The final cash at bank was £800,000, after paying the corporation tax due for that year.
His accountant dealt with filing the accounts and the corporation tax return. However, Dave felt he was sufficiently knowledgeable to deal with his personal tax affairs himself.
On 4 April 2022 Dave withdrew £800,000 from the company. He believed that he was able to claim Business Asset Disposal Relief (BADR) on winding up the company so would only pay 10% on the amount chargeable. This is after the annual exemption of £12,300 available for that year.
On 15 April 2022 Dave submitted a form DS01 to Companies House to dissolve the company. He chose to do this as all assets and liabilities had been settled and the surplus cash paid out.
In May 2022 Dave submitted his Self Assessment tax return for 2022. He declared the salary £12,000, dividends of £38,000 and a claim for BADR on the £800,000 received on the winding up.
Dave was rather pleased with himself that he had managed to sort everything out. He also saved quite a bit in personal professional fees and spent the Summer playing golf at his local club.
On 3 December 2022 Dave received a letter from HMRC enquiring into his 2022 tax return. In particular HMRC were disallowing his claim for BADR and instead wanted to treat the £800,000 repaid as a dividend. Consequently, this would mean that a significant part of the £800,000 would be taxed at rates of 32.5% and 38.1%. This is instead of 10%. If HMRC were correct, Dave’s future retirement plans were now in serious jeopardy.
HMRC pointed out that by submitting form DS01 Dave was striking off the company informally, which is what he intended to do. However, any distributions from such a striking off can only be capital if the amount is £25,000 or less. The relevant legislation is Section 1030A CTA 20210. To qualify for capital treatment on the full £800,000 Dave would have had to appoint a Liquidator and close the company through a Members Voluntary Arrangement.
Surely what is done is done and the £800,000 has to be taxed as a dividend, leaving Dave with a huge hole in his retirement finances?
Well, not necessarily. There are a couple of things that might come to Dave’s rescue.
In order for a dividend to be validly declared and paid there needs to be a Board Meeting, Board Minute and dividend voucher specifying the dividend payable and the amount due.
Our contention was that the £800,000 could not have been a dividend as it was not formally voted (in accordance with the details contained on HMRC’s own website!).
In our view the amount withdrawn can only have been a loan to Dave, so effectively it is still repayable to the company by Dave.
This means that the company should not have been struck off in the first place so an application should be made to restore the company to the register at Companies House. Once the company is restored, a Liquidator then has to be appointed to wind up the company correctly.
There are tax implications regarding director’s loans which would have to be sorted out and amended tax returns filed, so overall in an effort to save maybe £2,000 -£3,000 in professional fees at the start, Dave will instead incur total fees of around £14,000 plus VAT to achieve the outcome he originally wanted.
Always take professional advice before undertaking a transaction, however straightforward it may seem, and especially where the amounts involved are significant.
Next steps – ETC Tax can assist with all aspects of pre-liquidation or pre-sale structuring so please do contact us.
