HMRC has been forced to make changes to its approach to the anti-avoidance rule which can apply to shareholders who wind up their companies. What advice can you give to affected clients?
Since April 2016 if your client winds up a company are they are involved with a similar business in the following two years, a targeted anti-avoidance rule (TAAR) can increase their tax bill. Normally, they'll pay capital gains tax (at 10% or 18%) where they receive more from the company than they pai for their shares in it. However, if the TAAR applies, income tax (at up to 38.1%) is payable. For example, if the value of their share of the company increased by £500,000 from when it was acquired, the TAAR could cost up to an extra £140,000 in tax on winding up.
HMRC guidance amended
Tax experts haven't been happy with HMRC's guidance since it was published in 2016 as it was unclear and might lead to taxpayers incorrectly concluding that the TAAR applied to them. Following discussions with the Chartered Institute of Taxation, HMRC has made amendments to bring it in line with the legislation.
There are four conditions which must exist at the time a company is wound up for the TAAR to apply. The first two are wholly factual and clear. The third requires only a little interpretation and HMRC has made a very minor amendment to its guidance. The major changes are to the fourth condition.
What's the fourth condition?
TAAR won't apply if, "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."
HMRC's new guidance says that it's your client's decision whether the fourth condition is met and that the burden is on it to prove otherwise. If your client doesn't intend to get involved in a similar business within two years, the fourth condition won't apply event if they actually do get involved. Evidence should be kept to counter any assertion from HMRC that "it is reasonable to assume" that they had an intention to be involved with a similar business at the time of the winding up.
Tip 1. Consider what evidence might help. For example, proof that the idea of the new business occurred only after the winding up of the old. Records of discussions you had with your client or copies of subsequent unsolicited letters from third parties may help.
Tip 2. However, if your client does plan to start a similar business within the two years after ceasing the current one, instead of winding up the existing company use its built-up profits to lend money to the new business. The TAAR won't then apply.