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Tony Wickenden: Don’t let your business be a victim of its own success

Thinking of selling up? Entrepreneurs’ relief could be jeopardised by  investment assets or surplus cash

Last week, I talked about how easy it is for cash to build up in a successful business when you are totally focused on the day-to-day tasks. Maintaining your current success without focusing on future development does not often lead to a great outcome.

Not only can such a state of affairs take a toll on your personal life, it can also take its toll on your finances. A typical consequence is that you’ll be seriously overweight cash. This is not surprising, given there is often little time to spend on planning. But to be truly successful in achieving personal financial independence, every business owner needs to pay attention to, and take care of the fruits of their success.

Financial multi-tasking is the key, but to be good at this requires great self-discipline and commitment. It starts with taking care of the cash generated by your business. Cash accumulation is one thing, but, as an owner, you also need to recognise the importance of maximising the return and utility derived from that cash.

This is true for both personal and corporate cash; in fact, the two aspects are intertwined. One of the key decisions in relation to corporate cash is whether to distribute it or not and, if so, how. Then, once it is distributed, you have a personal investment decision to make.

So, what impact could neglected business cash have on the future availability of entrepreneurs’ relief? Well, as I have said in a previous column, care is definitely needed if there are excessive cash balances.

What advisers need to know about entrepreneurs’ relief

That said, HM Revenue & Customs now seems to adopt a more lenient approach. It tends to accept that cash generated from trading activities should not necessarily prejudice a company’s trading status. It takes the view that any surplus would have to be actively managed before it was considered to be a non-trading/ investment activity of the business.

“Actively managing” would include taking money off deposit to invest in collectives or insurance investment bonds. In contrast, merely holding on deposit any cash generated from trading would not seem to be harmful for entrepreneurs’ relief purposes, which is reassuring.

If cash balances are applied and managed as investment assets, HMRC will treat them as non-trading items and they would be subject to the 20-per-cent safe-harbour rule. In some cases, however, if cash is clearly surplus to the current or future needs of the business, it may be prudent for it to be extracted by the shareholders to avoid potential future loss of entrepreneurs’ relief.

Despite all this general guidance, though, there will be cases where it will be difficult to reach a firm conclusion as to whether the target company meets the trading test for entrepreneurs’ relief. The company may have significant funds tied up in investment property or have made large loans to individuals, (non-group) companies and so on.

When a sale is being contemplated, owner/managers will require some certainty that their entrepreneurs’ relief will not be prejudiced by the existence of investment assets or surplus cash balances. In such circumstances, they should seek a ruling from HMRC under the non-statutory business clearance procedure. Broadly speaking, this entails the owner/manager setting out all the technical concerns – that is, laying their cards on the table, then providing a reasoned argument as to why they believe that their company meets the entrepreneurs’ relief trading-company test.

HMRC has indicated that it will deal with these applications reasonably promptly – within a deadline of  28 days. A satisfactory clearance enables the seller to proceed with the confidence that they will benefit from the favourable entrepreneurs’ relief capital gains tax rate on the sale.

The stakes are understandably pretty high when it comes to the sale of a business, so the need for advice from and collaboration between appropriate specialists to secure exactly the right outcome is absolutely essential.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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