New Guidance on Company Winding-Up Rules

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.
So what’s the full story?

Targeted anti-avoidance

Since 6th April 2016 if you wind up a company and are involved with a similar business in the following two years, a targeted anti-avoidance rule (TAAR) can increase your tax bill. Normally, you’ll pay capital gains tax (at 10% or 18%) where you receive more from your company than you paid for your shares in it. However, if the TAAR applies, income tax (at up to 38.1%) is payable. For example, if the value of your share of the company increased by £500,000 from when you acquired it, the TAAR could cost you 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.

What’s changed?

There are four conditions which must exist at the time you wind up a company 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?

The fourth condition says the TAAR won’t apply if, “it is reasonable to assume, having regard to all thecircumstances, 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.”

New guidance

HMRC’s amended guidance makes clear that it’s your decision, not its, whether the fourth condition is met and that the burden is on it to prove otherwise. If you don’t intend to get involved in carrying on a similar business within two years, the fourth condition won’t apply even if you actually do get involved. To stay safe from attack keep evidence that will help fend off any assertion from HMRC that “it is reasonable to assume” that you had an intention to be involved with a similar business at the time of the winding up.

Tip 1. Think carefully about evidence that might help you. 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 accountant at the time may help, or copies of subsequent unsolicited letters from third parties asking you to get involved in a new venture.

Tip 2. However, if you do 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.

 

As long as the new business isn’t of a similar nature, the anti-avoidance rules won’t apply. The same is true if you sell your business instead of winding it up. If neither of these is possible, keep the existing company running and arrange for it to lend the money to your new business.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

For any assistance contact Companies999, we will be happy to help you!

How to claim compensation from HMRC

 

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