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.
Four conditions must be satisfied before the TAAR can apply:
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:
To clarify that a decision not to make a pre-winding up distribution will not on its own mean that Condition D is met.
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.
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).
To provide some clarity regarding the position of employees.