VOLUNTARY LIQUIDATION: TAX COMPENSATION

As the impact of Covid-19 and new, mutated strains of the virus continue ravaging the global economy, plenty of businesses have been forced to draw down their shutters or survive precariously. Government support through the extension of the CJRS (Furlough) scheme and modifying terms to Bounce Back Loans, being just some of the many changes made to the Chancellor’s initial Winter Economy Plan-enabled a myriad of businesses to cling on to survival.

The high-street has witnessed a blood-bath of closures with even centuries-old brick and mortar stores being unable to withstand the acceleration of online shopping brought about by Covid-19.

Nevertheless, a select few-3,126 to be precise-businesses have decided to purposely shut shop and cease trading. One may be wondering why voluntarily close a precious income stream if the entity can continue operating for the foreseeable future. Brexit? Lockdowns? Health concerns?

Not quite. Or at least not the principal factor influencing such radical decision-making.

The answer lies in one of life’s two detested guarantees-TAXES. More specifically, capital gains taxes (CGT). Our previous blog highlighted the deteriorating fiscal situation facing the British, and indeed global, economy which led to Mr. Sunak commissioning a study to identify a host of means by which to stabilise the economy and simultaneously avoid austerity. One of the most widely accepted means is a hike in CGT either by a certain percentage or to reasonably align it with income tax rates. Alternatively, existing allowances for CGT and inheritance tax could be abolished and/or reduced. Changes to off-payroll working manifesting via IR35 and suggestions to impose taxes on retained earnings of owner-managed entities have spelt further gloom for shareholders or proprietors of businesses.

A well-timed and intricately planned exit-strategy could save owners invaluable sums in tax and stress when figuring out how to dispose off their business.

Founders and managers of family-owned businesses seeking to transfer their legacy to the next generation or sell the business later down the line have brought forward their retirement to maximise the pot of money they receive on disposal of the entity. Leveraging the business asset disposal relief’s lifetime limit of £1 million, under which gains are taxed at 10% instead of the usual 18%(28%) on property, provided one is a basic (higher or additional-rate) income tax-payer. A tax-efficient strategy if utilised carefully.

The prevalent uncertainty conjured up by Covid-19 has also led to many entrepreneurs sidestepping their initial wait-and-watch approach to the unfolding of the pandemic which has propped up continuous losses for many and is leading to many businesses, considered viable less than a year ago, to liquidate and salvage any income from previous years whilst they exist. Mounting losses would’ve soon dried up these reserves, hence a prudent approach has been adopted by many.

Worsening matters for contractors, is the imminent advent of IR35 from April 2021 which removes tax advantages previously available to individuals who were employed as a contractor by a limited company and thus avoided paying income tax at the rate of 20% (or 40% to 45% depending upon one’s income tax bracket). Instead, the money earned was treated as revenue of a company and thus taxed at the corporation tax rate of 19% whilst also allowing the contractor to pay themselves a salary up to the tax-free threshold of £12500 which, classified as a business expense, further reduced their tax bill.

Thinking of dissolving your entity? Need specialists to guide you along the way to ensure every step is in the right direction? Then look no further than Cheylesmore Chartered Accountants. Our wealth of expertise and forward-looking mentality are assured to provide you with a comforting experience whilst maintaining your financial affairs in an immaculate state. Fill out a quick and simple contact form at the top of the page by clicking ‘Contact Us’ or book a 15-minute free consultation with one of our partners.