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A TAAR which is not so targeted

For many owner-managers, the proceeds that they receive from the winding up of a company will be treated as a capital gain. Assuming that the relevant tests are met, this gain will usually qualify for Entrepreneurs’ Relief and a rate of 10% tax.

There have been anti-avoidance rules in place for many years which seek to prevent the serial winding up of companies by overriding the capital gains rules and treating the proceeds as a dividend, subject to income tax of up to 38.1%.

The government has decided to strengthen these anti-avoidance rules by introducing a new Targeted Anti-Avoidance Rule (TAAR) which applies to certain company distributions in respect of share capital in a winding up. This TAAR treats the distribution from a winding-up as if it were a dividend chargeable to income tax, where certain conditions are met, for distributions made on or after 6 April 2016.

The new rules potentially apply to shareholders in a company controlled by five or fewer shareholders when it is wound up if:

  • broadly, within a period of two years beginning with the date on which a distribution is made, the individual is involved with carrying on a trade or activity which is the same as, or similar to, that carried on by the company
  • that it is reasonable to assume, having regard to all the circumstances, that the main purpose, or one of the main purposes, of the winding up is the reduction of a charge to income tax.

The first point above can be easily avoided by not becoming involved in a similar sort of business for at least two years. The second, unfortunately, is very subjective, especially when HMRC can use the benefit of hindsight.

HMRC have given a few examples to illustrate how the rules may work and have promised more to come.

Example 1

Mr A has been the sole shareholder of a company which has carried on the trade of landscape gardening for ten years. Mr A decides to wind up the business and retire. He liquidates the company and receives a distribution in a winding up. To subsidise his pension, Mr A continues to do a small amount of gardening in his local village.

Gardening is, of course, a similar trade or activity to landscape gardening. However, when viewed as a whole, these arrangements do not appear to have tax as a main purpose. It is natural for Mr A to have wound up his company because it is no longer needed once the trade has ceased. Although Mr A continues to do some gardening, there is no reason why he would need a company for this, and it does not seem that he set the company up, wound it up and then continued a trade all with a view to receive the profits as capital rather than income.

Example 2

Mrs B is an IT contractor. Whenever she receives a new contract, she sets up a limited company to carry out that contract. When the work is completed and the client has paid, Mrs B winds up the company and receives the profits as capital.

Mrs B has a new company which carries on the same or a similar trade to the previously wound up company and it looks like there is a main purpose of obtaining a tax advantage. All of the contracts could have been operated through the same company, and apart from the tax savings it would seem that would have been the most sensible option for Mrs B. In these circumstances a distribution after 5 April 2016 will be treated as a dividend and subject to income tax.

The rules could create an additional tax bill of 28.1% on £10 million, so if you are considering retirement or a new business venture which may involve the winding up of a company, please talk to us before you take any firm action.

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