The government has become concerned about companies being run for a short period of time, liquidated and then the trade restarted in another business vehicle. In order to address this, a new Targeted Anti-Avoidance Rule (TAAR) has been introduced 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 distribution chargeable to income tax where certain conditions are met for distributions made on or after 6 April 2016.
A distribution made to an individual in respect of share capital in the winding up of a UK resident company is a distribution of the company if Conditions A to C are met and the distribution is not excluded.
Condition A is that the company is a close company when it is wound up or was a close company at any time in the period of two years ending with the start of the winding up.
Condition B is that, at any time within a period of two years beginning with the date on which the distribution is made:
- the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company;
- the individual, or a person connected with him or her, is a 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 C is 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 avoidance or reduction of a charge to income tax or the winding up forms part of arrangements the main purpose, or one of the main purposes, of which is the avoidance or reduction of a charge to income tax. These circumstances include the fact that Condition B is met.
A distribution to an individual is excluded if or to the extent that it represents a repayment of an amount of share capital originally subscribed or the distribution is a distribution of irredeemable shares in a company which is an effective 51% subsidiary of the company which is wound up.
Clearly, some clients will need some education in this area to avoid falling foul of the new rules. Make sure you keep them informed.