I am thinking of leaving my business. I am a joint director of a building company. Once we have paid our tax bill there is still money in the account. Can my half of the money be transferred to a new company that I would create without having to pay more tax?
Arthur Weller replies:
One company can lend money to another company, and then write it off. If the two companies are not connected (i.e. not under common control), there will be a tax charge on the receiving company, as a non-trading profit (see HMRC’s Corporate Finance manual at www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm32010
). In your circumstance, you would have to consider whether the two companies were connected or not. Additionally, since you are a director of the first company, HMRC may seek to tax this transfer as employment income in your hands, similar to paying off the pecuniary liability of an employee (see HMRC’s Employment Income manual at www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim00580
). If the employment tax charge applies the corporation tax charge in the receiving company will not apply. However, it is doubtful whether HMRC has a valid argument here.
This question was first printed in Business Tax Insider in May 2019.