Why Liquidate When There May Be A Better Alternative?

The advantages of employee ownership may outweigh the benefits of liquidation for companies considering restructuring ahead of a new, less favourable tax regime.

 A recent Financial Times article (published 7 January ‘Tax changes set to spark liquidations’) reports that a pre end-of-tax year surge in liquidations may take place amid fears of an imminent tightening of the tax rules for companies. The liquidations are predicted to take place over the next three months before the end of the fiscal year in April 2016. Liquidated assets, under current provisions, are taxed as capital rather than income, thereby allowing company owners to avoid tax bills which could potentially be three times as large. The changes, which come into effect in April 2016, may expose certain corporate sectors, such as serial entrepreneurs, to tax rates as high as 38.1%. Accountancy and advisory firms have reported a rise in the number of liquidations such as Members Voluntary Liquidations (MLV) and other corporate restructurings aimed at companies pre-empting the changes and locking in lower tax rates. The changes come amid a crackdown on ‘phoenixisms’ whereby a company is liquidated and a new one set up immediately to replace it.

However, alternative routes do exist which could give rise to equally advantageous, and potentially superior, tax benefits. The proverbial “tax tail” should never wag the “commercial dog” (although it’s not just about tax: see below) but trading company owners who sell to an employee ownership trust can claim full tax relief against capital gains tax and employees can then be paid income tax free bonuses. This can be achieved without undermining business continuity and critically, without disrupting pre-existing employment relations, thereby laying foundations for more motivated workforce.  The company’s cash passes to its owners as with a liquidation, but the result is continuity of the business with new employee owners rather than the elimination of the company.

The trend towards employee owned companies has increased in recent years. 2015 has been a year of significant growth in the sector, where the number of employee owned businesses is growing at an annual rate of just under 10% .  The impact of employee ownership extends beyond tax, with increasing rates of productivity (up 4.5% for employee owned companies, compared to zero net annual productivity for UK companies as a whole), increased operating profit and overall a more progressive form of corporate governance. Clearly, employee ownership is not a panacea, but the strong movement currently being witnessed speaks volumes of its potential, and not solely for its tax benefits.

If you or your clients would like to discuss any of the developments mentioned in this newsletter, please contact:

Robert Postlethwaite rmp@postlethwaiteco.com

David Reuben dgr@postlethwaiteco.com

Stephen Chater spc@postlethwaiteco.com

Judith Harris jdh@postlethwaiteco.com

or call us on 020 3818 9420