Make it Loud and Clear

Use the additional information box when completing your tax return

Use of the white space on the Self-Assessment tax return is recommended where there is uncertainty about the tax treatment of a transaction or source of income, so as to protect the taxpayer against penalties for errors. This will be particularly relevant for those contractors who have wound up their companies in the year ended 5th April 2017 and sought to claim Entrepreneurs’ Relief.

Company distributions legislation

New rules were introduced from 6^th April 2016 to prevent individuals converting a dividend into a capital payment and, as a general rule, apply where an individual who winds up their company continues to carry on, or be involved with, the same or similar trade within the next two years and the main purpose of dissolving the company was to reduce their tax liability.

Finance Act 2016 introduced sections 396B and 404A ITTOIA (Income Tax (Trading and Other Income) Act) 2005 which imposes a Targeted Anti-Avoidance Rule (TAAR). The TAAR will treat a distribution from a winding up as if were an income distribution, ie a dividend, where four conditions are met, with the main conditions being:

Condition C

Within 2 years after the distribution:

• the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company;
• the individual is a partner in a partnership which carries on such a trade or activity;
• the individual, or a person connected with him or her, is at least a 5% participator in a company which at that time carries on such a trade or activity, or is connected with a company which carries on such a trade or activity; or
• the individual is involved with the carrying on of such a trade or activity by a person connected with the individual

Condition D

• 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 avoidance or reduction of a charge to income tax’ or
• It is reasonable to assume, having regard to all the circumstances, that the winding up forms part of the arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax.

Where there is a genuine non-tax motive for winding up the company, then condition D is not satisfied and the legislation should not apply.

The 2016/17 tax year is the first tax year in which the legislation becomes relevant, so those contractors that have dissolved their companies and treated the final distribution as capital in the period 6^th April 2016 – 5^th April 2017 may wish to consider using the tax return additional information box (the ‘white space’) to provide additional details, such as information on the background to the winding up and why they believe the rules do not apply. This is the message that the Association of Taxation Technicians (ATT) are sending out to those affected taxpayers.

In a recent press release, Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:

“As these new rules are self-assessed, taxpayers have to decide whether they apply. They must therefore be considered in any situation where a taxpayer has wound up their company since 6^th April 2016 and continues to be involved in similar activities.

Deciding whether the rules apply is complicated by the subjective nature of the conditions, the lack of any clearance facility and the limited practical examples in HMRC’s guidance [Company Taxation Manual 36300].

It is unclear whether if a taxpayer believes that they do not apply, but HMRC concludes they do, penalties will be imposed.”