Concerns over new targeted anti-avoidance rule in winding up cases

Ahead of the final committee stage of Finance Bill 2016, accountancy bodies are flagging up concerns about a proposed new Targeted Anti-Avoidance Rule (TAAR) relating to share capital distributions when a company is wound up, saying it needs further clarification or risks negatively impacting some genuine commercial transactions

The proposal is contained in Finance Bill 2016 clause 35 which creates a TARR which will affect some distributions made to an individual in respect of share capital in the winding up of a UK resident company. It will apply if four conditions are met, which include there being an intention to gain a tax advantage.

Where the TAAR applies, the distribution will be taxable as income rather than as capital, whereas distributions in the course of winding up are normally treated as capital and therefore taxable at lower rates.

The CIOT says in its response to HMRC’s consultation the TAAR is widely drawn and potentially encompasses a very wide a range of legitimate commercial situations where tax avoidance is not likely to be the motivating factor.

The institute also points out that the TAAR does not have a formal advance clearance procedure, whereas various other parts of UK tax legislation applicable to significant transactions do. This means that taxpayers will have to self-assess whether the TAAR applies or not. 

CIOT says a clearance procedure would enable taxpayers to obtain a ruling from HMRC in advance of a transaction, which would reduce uncertainty. 

Tina Riches, chair of the CIOT’s owner managed business sub-committee, said: ‘As it stands, without an advance clearance procedure, it will be crucial that clear guidance on how HMRC plan to interpret the legislation is made publically available by HMRC. This should be published as soon as possible, even if in draft, in order to minimise the uncertainty that the legislation has created. 

‘We have therefore sent HMRC 18 examples of transactions provided by our members that we think are suitable for guidance and on which HMRC’s view is needed.’

ICAEW has also signalled  its concerns about what it says are a number of uncertainties and ambiguities in the new rule, which states that that the person who receives the distribution may be caught if at any time in the two years following the receipt, they are involved with the carrying on of a trade or activity that is similar to that of the trade or activity carried on by the company wound up. The institute says the phrase ‘involved in’ is unclear and should be more clearly defined. For example, would a father who winds up his company be penalised if he later offered some business advice to his son who carried on a similar trade?

ICAEW is also calling for the terms ‘similar’ and ‘activity’ to be clarified, amid concerns that individuals will be penalised for setting up businesses in the future that may offer services which represented only a small part of the previous company’s trade (e.g. a company that had an accountancy practice is liquidated and an ex-shareholder who was the tax ‘partner’ decides to continue to offer tax advice).

In addition, ICAEW says there should be details of  how far back the company’s previous trade is deemed relevant for comparisons.  For example, would the activities that the company carried on some years previously be a problem, or only those activities carried on just before the winding up? The institute suggests inserting a two-year period prior to the commencement of the winding up as a solution.

ICAEW’s comments are here.

CIOT’s response is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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