Key Post Can you get Entrepreneur Relief on cash built up in company?

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DualPublicPriva

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I just wanted to check if one is entitled to Entreprenuer Relief on €1 million accumulated profit, held in cash, if all other conditions of the relief are met? I have received conflicting advice on this from an accountant and a tax advisor, so not sure who is correct? Accountant says you can't get the relief on cash, but tax advisor says you can.
 
That is not a straightforward question, devil in the detail etc...

Firstly, is this a company or a sole trade (I'm going to assume company)?

The remainder of this answer is from Gemini, but I've read it and I believe it's not hallucinating:

The primary question is whether the shares you are selling are considered "qualifying business assets" for the purposes of Entrepreneur Relief.

The cash balance is not itself the qualifying asset in this case; it's an asset of the company whose shares you are selling.

The presence of a significant cash balance impacts the assessment of whether the company's shares are "qualifying business assets" in the following way:

The "Wholly or Mainly" Trading Test

For shares in a company to be considered a qualifying business asset, the company must be a "trading company." This is a key condition of the relief. A "trading company" is defined as a company that carries on trading activities as opposed to holding investments.

The presence of a large cash balance in a company can cause it to fail the "wholly or mainly" trading test.

* What is "wholly or mainly"? Revenue's interpretation is that the company's business must be at least 80% trading, as measured by a combination of factors.

These factors can include:
* The company's asset base (the value of its trading assets vs. its non-trading assets).
* The company's turnover (trading income vs. investment income).
* The company's expenses (trading expenses vs. investment expenses).
* The time and effort spent by directors and employees on trading activities vs. investment activities.

How Cash Balances Are Assessed

A cash balance in a company is not automatically considered a non-trading asset. The classification depends on its purpose:

* Trading Cash: If the cash is actively used for the day-to-day operations of the business (e.g., to pay wages, suppliers, or for imminent capital expenditure), it is considered a trading asset.

* Investment Cash: If the cash is surplus to the company's trading needs and is simply held passively, Revenue may classify it as an "investment asset." This is particularly true if the cash is held for an extended period, earning interest, and there is no clear and genuine plan for its use in the business.

The Impact on Your Situation

Let's apply this to your €1 million cash balance:

* If the €1 million is deemed to be "investment cash": It would be classified as a non-trading asset. If this €1 million represents a substantial portion of the company's total assets, it could cause the company to fail the "wholly or mainly" trading test. For example, if the company's only other assets are trading assets valued at €200,000, the company would be seen as a "cash box" and would likely not qualify for Entrepreneur Relief.

* If the €1 million is deemed to be "trading cash": If you can demonstrate to Revenue that the cash is required for a bona fide trading purpose (e.g., to fund a major expansion, a new product line, or purchase a significant piece of machinery), it would be classified as a trading asset. In this scenario, the company would be more likely to pass the "wholly or mainly" trading test, and the shares would therefore be "qualifying business assets."

This is why the advice you received was conflicting. The accountant likely assumed the cash was surplus to trading needs, while the tax advisor may have assumed it was working capital or had a trading purpose, or they may have a different interpretation of the "wholly or mainly" test. The factual circumstances of your company are crucial in determining the correct answer.
 
If the cash is obviously "investment cash" could this be potentially outweighed by the fact that the majority of income is trading income? So the €1m might generate €15/20k in interest but if there was €200k in trading income would that possibly sway Revenue?
 
DualPublicPriva said:
I have received conflicting advice on this from an accountant and a tax advisor, so not sure who is correct? Accountant says you can't get the relief on cash, but tax advisor says you can.
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I see from a previous post that you are a HSE employee and you also have a LTD company earning c.€80k p.a. in profits.

We'll assume you are a consultant or contractor of some description invoicing out for your services and that €1m was not built up through an investment in crypto or Gamestop shares! Presumably the annual trading income is many multiples of any annual income on the cash.

If after 12 years or so you wish to liquidate, why wouldn't you get Entrepreneur Relief on that €1m retained profit sitting as cash on the balance sheet (assuming the other conditions such as working time etc are met)?

I presume there's plenty of incorporated IT contractors out there charging daily rates, paying themselves a salary from the company, building up profits that sit as cash on the balance sheet, and ultimately liquidating the company and availing of Entrepreneur Relief. This accounting firm seems to be proposing just that: https://www.iconaccounting.ie/blog/entrepreneur-relief

The accountant you spoke with may be confusing your scenario with one of the conditions of another CGT relief - Retirement Relief i.e. that in order for full relief to apply on a disposal, all of the company's chargeable assets must be chargeable business assets. A pure "cash box" could not avail of Retirement Relief as cash is neither a chargeable asset nor a chargeable business asset, but any candidate for Retirement Relief would surely have a chargeable asset and a chargeable business asset on the balance sheet so that they wouldn't suffer pro-rated relief.
 
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I got advice on this for a client last year and the tax advisor said it is a very hard needle to thread. You really need expert tax advice on doing this. Two points that were raised are:
  1. there is an exclusion for assets held as investments. Holding the money in cash is deemed as an investment if you receive any interest on it.
  2. The company must be put into liquidation on the last day of trading. That means you will have had to get rid of assets before you stop trading
 
Going back to basics of Section 597AA Entrepreneur Relief ("ER") and applying it to the question posed by the OP (knowing that they are obviously going to get professional advice and this is only a general discussion):

1. ER is available to both a sole trader and a shareholder.

2. The asset being sold (upon which there is a capital gain where someone is claiming ER) must be a "Chargeable Business Asset" (CBA). A CBA is, either:

(i) an asset (including goodwill) used for the purposes of a "qualifying business" carried on by an individual (i.e. this applies to a sole trader), or

(ii) a holding of ordinary shares in a company whose business consists wholly or mainly of carrying on a "qualifying business" (i.e. this applies to a company owner).

3. A CBA does not include securities or other assets held as investments, development land etc.

4. What is a qualifying business? A qualifying business means a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land.

At this point, where are we?

If I am an individual and I buy Apple shares and realise a capital gain, can I get ER on the gain? No - due to point 3 above. If I own a commercial building or residential premises which I let out, sell it and realise a capital gain, I cannot get ER for the same reason. The Apple shares and the letting premises are not CBAs.

If I am a sole trader operating a newsagent business and I sell my business consisting of the premises I operated out of and maybe some goodwill, I should be able to get ER on the disposal of both assets (premises and goodwill) as the premises was used for the business - it is not an investment asset. The premises and goodwill are CBAs.

What if I start a 'capital-light' LTD company that provides consulting services? The company earns €100k p.a. in after-tax profits. There are practically no fixed or current assets - the company employee performs the company's business using a laptop and a Zoom subscription. Money builds up in the company bank account. After 10 years I want to liquidate the company. €1m has accumulated in cash over the period. If I was to liquidate the company, my capital gain is c.€1m (let's assume I started it with little or no equity). Can I get ER on that gain?

Going back to the numbered points earlier:

- Per point 2, are the shares that I am disposing of a CBA? We know it's a "holding of ordinary shares".

- Is the company's business wholly or mainly of carrying on a "qualifying business"? A qualifying business means a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land.

- The company is not buying and selling securities or land. I, as an employee of the company, work 40 hours a week consulting for several clients which the company invoices. The clients pay the invoiced amounts into the company bank account. The company's business is plainly, and by any reasonable measure "a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land." It's a consulting services firm.

- The company is not obliged to use the company funds to procure assets such as property, equipment or inventory.

Getting back to the question the OP posed, I know we can caveat, insert provisos, and suck air in through our teeth about this until the cows come home, but to suggest that if a bank paid the company any interest on the cash in it's account, or that the company, having accumulated €1m in cash from its trade over the years, is now somehow an investment company, and cannot be considered to be carrying on a qualifying business so that ER would be null and void for the company owner, is a bit mad.
 
AAAContributor said:
Getting back to the question the OP posed, I know we can caveat, insert provisos, and suck air in through our teeth about this until the cows come home, but to suggest that if a bank paid the company any interest on the cash in it's account, or that the company, having accumulated €1m in cash from its trade over the years, is now somehow an investment company, and cannot be considered to be carrying on a qualifying business so that ER would be null and void for the company owner, is a bit mad.
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This is an interesting scenario - the purpose of the relief as I understand it, is to facilitate people in building valuable trades, which can be sold or have their value realized, so I'm going to play devil's advocate.

What you're describing above is a case where no valuable trade / business ever actually exists, as it's a personal services company and any goodwill is personal to the principal rather than reflected in the value of the company (or its shares).

The value of the company at the day it's ceased and liquidated is entirely represented by a non-trade asset in the form of the cash. Yes, it represents the accumulated undistributed profits of the company trade, but the cash is not working capital or in any way an asset used for the purposes of the business.

Objectively, if you are asked to look at a company, which has a balance sheet value of €1m based entirely on cash at bank, and carries on a trade with annual turnover (and profit) at 10% - 15% of this value, I believe it could be difficult to categorize the business of the company as being wholly or mainly trading. The business of the company is both a trade and stewardship of €1m for the shareholders - the fact that the directors are choosing not to actively invest the money to earn a return from it doesn't alter the fact that a substantial part of the company's function (i.e. its business) as at the material time, given the fact pattern, is to safeguard that value for the shareholders.
 
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torblednam said:
I'm going to play devil's advocate
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From my side, I'm trying to rationalise if Entrepreneur Relief could be claimed, and why the tax adviser said to the OP that it could, as I would have similar thoughts and beliefs to what you have articulated.

Whatever about our theorising on the motives for Entrepreneur Relief, if we take things back to the real world:

1. A tax adviser has said to the OP that Entrepreneur Relief could be claimed. I presume the tax adviser would have sounded some facts out and hopefully had actual experience in advising on Entrepreneur Relief (and their field wasn't VAT!) before offering an opinion. But, this may not necessarily be the case - they could have shot from the hip and strayed outside their area of expertise. Or, this is a hypothetical situation where no tax adviser was consulted and the OP did not like the answer from the accountant and is canvassing views on the matter!

2. We have the accounting firm I referred to illustrating a worked example on their website as to how a contractor can avail of Entrepreneur Relief on their company's accumulated cash, which I presume the firm got tax advice on before publishing. A devil's advocate might say that the scenario described has relief being availed on a cash pile that is a low multiple of the company's annual gross revenue. But, at what point does one step over the line here, if there is such a line?

3. In my own professional life, whilst I've never worked as a tax adviser, but am a keen student of the area, and interact with tax advisers who do opine on this area, I have examples of advice to individuals on incorporating to invoice self employment income (again, consulting work) through a company rather than personally, where the advice was that Entrepreneur Relief was to be targeted down the line on a liquidation. Again, another tax adviser may take a different view and, admittedly, none of the situations I have in mind have gotten to the liquidation stage where advice would be confirmed again on the filing of the CGT return and the actual claiming of the relief, so I can't say for certain.

4. On your goodwill point, the fact that the relief is available on a liquidation, would lead me to believe that this doesn't need to be a factor in the share value. If the legislation and guidance said that relief is only available on a disposal of shares to a third party, then your point about the need for a valuable trade / business to exist would carry more weight.
 
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My point on the need for a valuable trade to exist is entirely directed towards the factors that you might consider relevant in determining whether "the business" of the company is wholly or mainly trading. If the value of the company/ its shares is entirely in a cash pile, then this will point away from it qualifying - if on the other hand you can point to the fact that notwithstanding the company being light on physical assets, there's a brand / goodwill value from a recurring client base or similar that can be realized, this would mitigate things.

This relief is still relatively novel, so the issue we're discussing may not have been fully hashed out yet, to the point of any tax appeals involving / considering it.

It will be very much an each case on its merits thing, too, and it's certainly not clear when the line between wholly or mainly trading, or not, is crossed.
 
torblednam said:
My point on the need for a valuable trade to exist is entirely directed towards the factors that you might consider relevant in determining whether "the business" of the company is wholly or mainly trading.
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If we look at the legislation, it doesn't request that the business is 'wholly or mainly trading', it comes at it from another angle and simply asks us if it is:

"a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land".

'Wholly or mainly a trading company' is a term used in another CGT relief that is not under discussion here.

Let's leave out the holding and development of land, and focus on the phrase - "a business other than the holding of securities or other assets as investments".

The phrase "the holding of securities and assets as investments" is akin to the definition of an 'Investment Company' in Section 83 which defines it as a business wholly or mainly of making investments and deriving the principal part of their income from investments.

Again, coming back to the IT contractor in the online example I linked to, I can see the scope for businesses such as this to say their business is very much not the holding of securities or other assets as investments. They incorporate for €1 and build up equity. They don't incorporate with €1,000,000 and invest in crypto, government bonds, shares, rental property etc and do a bit of consulting work on the side.

If the cash pot being built up was being invested by the company to earn capital gains and investment income that overwhelmed the company's Case I income, then yes, but a firm with one employee plowing away at their consulting work and building up cash in the company bank account and calling it quits at a certain stage, I can certainly see how a tax adviser could sign off on this as eligible for Entrepreneur Relief.

What do you think about the accounting firm's example that I linked to in Post #4?

Would you say that CGT @ 33% was due here instead of the proposed 10%? Do you think if the company in the example continued trading for a few more years and accumulated more cash, that at some point, it tips over the edge, and the individual's capital gain (assuming gain is <€1m) would be ineligible for Entrepreneur Relief?

torblednam said:
It will be very much an each case on its merits thing
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This we can agree on!
 
@AAAContributor excellent analysis there, and thanks for pointing out that I fell into the trap of importing the wrong words into my analysis!

I'm now leaning more towards your view, given the definition of qualifying business being a bit of a wider gate than I envisaged... there'd probably have to be an awful lot of cash, relative to the scale of the trade, for Revenue to bite. The example of the IT contractor, where the amount is at most a couple of years' turnover and a few years' net profit, would seem unlikely to raise the hackles.
 
I’ve seen that position taken several times (including by my own Financial Advisor, but not, bizarrely, by my tax advisor). I’d really like to know is there a case of Revenue challenging an MVL and ER out there though? I’ve heard of them (hearsay) for Retirement Relief, but the rule seems clearer there that cash is excluded
 
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