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Where Taxpayers and Advisers Meet

Can Enterpreneur's Relief be denied for "cash rich" and other less obvious reasons

skray
Posts:44
Joined:Mon Oct 29, 2012 5:01 pm
Can Enterpreneur's Relief be denied for "cash rich" and other less obvious reasons

Postby skray » Thu Dec 07, 2017 11:53 am

Hi,
I am a contractor(software developer) and own a personal services company, that I use to invoice the client. I am the sole owner and trading since 2011 (i.e. longer than 1 year). I pay myself a small salary and occasionally dividend - but bulk of my revenue is still held in my business bank current account.
Since I do not have a cash flow problem at the moment I do not intend to transfer the funds in to my personal bank account in the form of salary or dividend, and intend to eventually liquidate the company (Member's Voluntary Liqudation) and claim the money as a profit - which is tax efficient if I claim Enterpreneur's Relief (I am below the threshold).

Generally speaking I qualify for ER, but I think I read somewhere in the past companies such as mine, which do not invest in fixed assets, and hence "cash rich" may be deemed as "investment company(?)" by HMRC, and ER may be denied in these cases.

1)I would like to know if this is true and then under what circumstances it is, and if there are any other less obvious reasons for which Enterpreneur's Relief can be denied.
2)Does it make any difference (or make it worse) if I invest the money held in business current account in business term deposits to earn some interest.

Thanks

SteLacca
Posts:448
Joined:Fri Aug 07, 2015 2:17 pm

Re: Can Enterpreneur's Relief be denied for "cash rich" and other less obvious reasons

Postby SteLacca » Thu Dec 07, 2017 12:18 pm

There was talk prior to budget 2016 that anti-avoidance legislation would be introduced to prevent moneyboxing and ER together. However, it never materialised, and so at the moment, provided that the surplus funds are not actively managed (i.e. if they are just sat in a bank account) then you are fine. If you manage the investments then this could prejudice the trading status of the company to an extent that it will fail to qualify the trading test.

However, since this has already been pondered by the Treasury, and it's an obvious potential target, I wouldn't rule out legislation being introduced in the future to prevent it.

skray
Posts:44
Joined:Mon Oct 29, 2012 5:01 pm

Re: Can Enterpreneur's Relief be denied for "cash rich" and other less obvious reasons

Postby skray » Thu Dec 07, 2017 1:02 pm

Hi SteLacca - thanks for the response. I am not seeking professional advise - but "If you manage the investments then this could prejudice the trading status of the company to an extent that it will fail to qualify the trading test" - I only have a Business Fixed Deposit 95 days Notice account which pays interest monthly. After the interest rate rise I have simply added some additional funds to the same account - will such simple investments still compromise the trading status and jeopardize claim to ER?
Thanks

SteLacca
Posts:448
Joined:Fri Aug 07, 2015 2:17 pm

Re: Can Enterpreneur's Relief be denied for "cash rich" and other less obvious reasons

Postby SteLacca » Thu Dec 07, 2017 2:22 pm

It's unlikely to, but you have to be careful to ensure that you don't become more active. For example, investing in a shares portfolio would likely amount to active investment, and the company would be deemed to be a non-trading investment company at the cost of ER being available.

Similarly, even moving money between accounts to benefit the best interest rate could be considered to be active management with the same consequences.

Unfortunately, there's no hard and fast rule, and any dispute would probably have to be settled at tribunal.

For the purpose of ER, trade has the same meaning as that in ITA s.989, which unfortunately, simply defines a trade as "Any venture in the nature of a trade".

skray
Posts:44
Joined:Mon Oct 29, 2012 5:01 pm

Re: Can Enterpreneur's Relief be denied for "cash rich" and other less obvious reasons

Postby skray » Sun Sep 05, 2021 10:50 am

Hi
"There was talk prior to budget 2016 that anti-avoidance legislation would be introduced to prevent moneyboxing and ER together. However, it never materialised"
I am proceeding with liquidating my company - was any legislation eventually passed to prevent moneyboxing.
Thanks


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