Liquidations And Phoenixing
Do you know your tax position?
Liquidations have long been used by business owners to extract the maximum value from their business and pay Capital Gains Tax as opposed to Income Tax ...
Be careful your liquidation doesn't turn into a phoenix business or you'll be caught by TAAR!
copyright: foottoo / 123rf stock photo (licensee)
This is because a business owner whose company is a trading company and qualifies for Entrepreneurs' Relief, will pay CGT at a rate of 10% on winding up their company and extracting its reserves, as opposed to 7.5%, 32.5% or even 38.1% which are the dividend tax rates effective from 6th April 2016.
Due to this capital vs income divide, the Government believes that some have exploited the liquidation route and are running businesses for a short period of time and then liquidating them just to restart the same business the following day.
"This is called a Phoenix business!"
To address this, legislation was introduced in 2016 which would override the standard CGT treatment in certain circumstances. This is known as the Targeted Anti Avoidance Rule (TAAR). Where the TAAR applies, distributions made on a winding-up will be treated as a distribution chargeable to Income Tax.
The new rules broadly apply where:
Individuals hold 5% in the company immediately before winding up
The company was a close company at any point in the two years ending with the winding up
Within two years of 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
The individual is involved with the carrying on of such a trade or activity by a person connected with the individual
Avoidance of Income Tax is the main purpose, or one of the main purposes, of the winding up
HMRC's long awaited guidance on the TAAR was published last month which included some examples of what, in their view, would and would not be caught by the TAAR. However, the guidance is disappointing in its brevity and has been met with negativity from the profession.
One typical example that had been put to HMRC in advance of the guidance being published was from the construction industry, where it is considered commercially essential that each development project is done through a separate company.
This is because if something goes wrong with one project, it will not taint the others. HMRC has advised that it is not the intention of the legislation to target commercial transactions, which should provide some comfort but the guidance does not cover this.
As can be seen from the above this is an area of uncertainty and any business owner considering winding up their company should take professional advice.
"Do you want to know more?"
If you'd like to know more about the TAAR, Entrepreneurs' Relief, Capital Gains Tax or Income Tax in relation to liquidation of a business, do give me call on 0333 335 0427 or click here to ping over an email and let's see how I can help you.
Until next time ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.