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The proposed changes to the taxation of dividends for entrepreneurs and small business owners in April 2016, has instigated a rise in the number of solvent liquidations in the early stages of this year, with many more companies expected to enter into a solvent liquidation ahead of the anticipated tax changes in April.
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 member’s 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%. If the proposed changes are brought in, such distributions may be subject to Income Tax, which could have the effect of quadrupling the tax bill for the shareholders.
HM Revenue & Customs (HMRC) 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. Those who own numerous different businesses could be notably affected by the rule changes, which were revealed in a consultation document published in December.
Many of those who do become aware of the incoming changes, which could soon see entrepreneurs exposed to tax rates as high as 38 per cent, are expected to take up the option of placing their companies into solvent liquidation prior to the new tax year ahead of the proposed changes.
At LB Insolvency Solutions Limited, we have undertaken an increased number of these solvent liquidations since the beginning of the year and are happy to discuss any aspect of this process with you or your clients if you think the changes in the tax rate will have an impact.
To take advantage of the existing relief, the Company will need to enter into Liquidation and the distribution made prior to the 6 April 2016.
All consultations are confidential, no obligation and free of charge. In the first instance, please contact Andrew Dix or Nicole Southwell on 01245 254791 or email firstname.lastname@example.org
But HMRC are stating that the intended aim of the rule changes are to incentivise entrepreneurs to arrange returns as income rather than as capital from their companies.
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 pay-outs being initiated in the weeks and months prior to 6 April 2016.
LB Insolvency Solutions Ltd registered in England © 2015 Company Number: 04715415