Moneyboxing and Phoenixism: Important tax changes in 2016

Written by Paul Windsor on 18 December 2015

Following hot on the heals of a well publicised Autumn Statement, HM Revenue & Customs quietly issued a consultation document on 9th December, the implementation of which would have wide ranging consequences for many of our business clients as well as company owners across the country.

The changes proposed in the document are mainly focussed on “moneyboxing” and “phoenixism”. The first is where profits are allowed to accumulate in a company which are then extracted in capital form by way of a liquidation. The second is where a trade is carried on in a company (e.g. property development) and a project is finished and the profits then extracted in capital form by way of a liquidation. Soon afterwards the shareholders form another company and start another project, and then liquidate the second company, and so on.

Both of these methods of arranging for returns from a company to be taxed as capital rather than income, have been used for many years and are a perfectly legitimate means of reducing the overall tax burden on hard working company owners. The pressure has arisen because, from April 2016, the way in which dividends are taxed has been fundamentally reformed and will increase the tax liability on company owners, thus increasing the incentive for returns to be taxed as capital rather than income.

The government believes that it is unfair that some people can arrange their affairs to take advantage of lower rates of tax and propose amending the Transactions in Securities legislation to treat both these capital distributions as income. For many clients this will see tax rates increase from 10% (with Entrepreneur’s Relief) to 38.1% with the new 7.5% dividend surcharge.

Further announcements will be made in the Chancellors budget on 16th March. Please contact us now to discuss how your own future tax plans may be affected.