TAAR for that

HMRC update guidance on Targeted Anti-Avoidance Rule

Following recent discussions between the Chartered Institute of Taxation and HMRC, the Revenue have now updated their guidance on the Company Distributions Targeted Anti-Avoidance Rule (TAAR) within the Company Taxation Manual (CTM).

The TAAR, contained in Sections 396B and 404A ITTOIA (Income Tax (Trading and Other Income) Act) 2005, was introduced from 6th April 2016 to prevent ‘phoenixism’. Very broadly, ‘phoenixism’ is the practice which involves company owners winding up their old companies and extracting the remaining monies as capital instead of income, and then repeating this process in one or more successive new companies.

Where the TAAR applies, an individual is prevented from treating the final distribution as a capital gain, subject only to 10% capital gains tax where Entrepreneurs’ Relief applies, by re-classifying the distribution as a dividend subject to income tax.

Conditions

Four conditions must be satisfied before the TAAR can apply:

1. The individual receiving the distribution had at least a 5% interest in the company immediately before the winding up;
2. the company is a ‘close company (broadly closely controlled – this will be the case for PSC’s) when it is wound up, or at any point in the two years ending with the start of the winding up;
3. the individual continues to carry on, or be involved with, the same trade or a trade similar to that of the wound-up company at any time within two years from the date of the distribution; and
4. it is reasonable to assume that the main purpose or one of the main purposes of the winding up is the avoidance or reduction of an income tax charge, or that the winding up forms part of such arrangements.

Whilst CTM36330 (condition C – ‘involved with’) has been tweaked so that the text mirrors the legislation, several new paragraphs have been added to CTM36340 (condition D – tax avoidance) as follows:

• “A decision by a company and its shareholders not to make an income distribution prior to the company’s being wound up does not, by itself, mean that the main purpose test is met”.

To clarify that a decision not to make a pre-winding up distribution will not on its own mean that Condition D is met.

• “The individual will know their purpose and, if fairly described, can be confident that there will be enough supporting evidence (“having regard to all the circumstances”) for an officer to arrive at a sound conclusion when applying the test of whether it is ‘reasonable to assume’ that a main purpose of the winding up or the wider arrangements was the avoidance or reduction of a charge to income tax. The individual should self-assess on that basis. HMRC can only displace this self-assessment where the individual’s decision is not reasonable”.

To explain that it is for taxpayers to decide that “it is reasonable to assume” having “regard to all the circumstances” that tax avoidance is not the main purpose (or one of the main purposes) of the winding up and self-assess on that basis.  In the event of a challenge by HMRC as regards the application of Condition D it is for HMRC to demonstrate that the conclusion reached by the taxpayer was not reasonable.

• “The main purpose test is applied by reference to intentions known at the time the decision was made to wind up the company. However, this will be evidenced by what happens after the winding up occurs and it is likely that, in order to test assertions in relation to the main purpose, officers will review all available evidence”.

To clarify that the test in Condition D is applied by reference to facts and intentions known at the time the decision was made to wind the company up, but that HMRC will want to look at all the evidence including that relating to what happens after the winding up has taken place (for example if the intention is that the taxpayer retires completely when the winding up occurs but is within two years offered, and accepts, a position in the same trade, HMRC will want to look at the evidence that the offer was unsolicited).

• “Subject to the facts of the case, where Condition C is met due to an individual remaining ‘involved with the carrying on of a trade as an employee, rather than as an owner, shareholder or partner, and has no involvement in or influence over the direction or decision-making of the entity carrying on the activities, it is less likely that Condition D will be met”.

To provide some clarity regarding the position of employees.