Another Sneaky Tax Hike!

Another Sneaky Tax Hike!

Didn't find your answer?

Replies (25)

Please login or register to join the discussion.

Head of woman
By Rebecca Cave
13th Feb 2016 07:47

I covered this back in December 2015

As soon as the draft legislation appeared I wrote this article:

https://www.accountingweb.co.uk/article/tax-avoidance-blocking-cgt-route/594041

So I did warn you.

Thanks (2)
avatar
By cparker87
13th Feb 2016 09:39

pheonixing
I understand it is geared toward pheonixing. Eg securing Er on an MVL, waiting a couple months. Starting co again and repeating cycle when assets built up.

Seems a sensible hole to plug.

Thanks (1)
avatar
By cathygrimmer
13th Feb 2016 09:58

Sneaky?

I don't think it's been kept a secret - all my clients seem to have heard about it. It wouldn't really be in HMRC's interests to keep it quiet as the intention (I imagine) is to deter people from trying it rather than to jump on them after they've done it - as that would require looking for cases - with the resultant cost.

Given (as cparker87 says) that it is to stop phoenixing, I don't have a problem with it.

Cathy

Thanks (1)
By johngroganjga
13th Feb 2016 10:24

As a matter of interest how does it work if the tax treatment can't be determined until after the end of the period within which any resumption of business would be relevant? What does the taxpayer put on their return first time round?

Thanks (0)
avatar
By bumpdinkwhallop
13th Feb 2016 11:09

It was a great way to convert income into capital though. IT contractors where doing this for years. for example per contract and eating up there ER lifetime allowances. Ovbiously it changed with the £25000 limit. It actual goes further than you think as the new connected person rules state that if connected persons even open up a company within 2 years doing a similar type of thing this would be caught under the new rules. So wife, brother sister etc.

John im assuming you would just go ahead and populate the clients tax returns treating the distribution as a capital gain, ie company share buy back, claim ER and pay tax at 10% on the gain less the exempt amount. This would be done in the year the actual gain materalised. The revenue would then need to open up an enquiry to Restate the distribution as income and tax in to income tax as a dividend......... I think

The only problem i have with it is that as a novice tax advisor another opportunity to reduce clients tax liabilities seems to have narrowed somewhat

Thanks (0)
Replying to johnjenkins:
avatar
By BromleyBob
14th Feb 2016 11:33

"blackmail" opportunity?

bumpdinkwhallop wrote:
It actual goes further than you think as the new connected person rules state that if connected persons even open up a company within 2 years doing a similar type of thing this would be caught under the new rules. So wife, brother sister etc.

So the son of someone who had retired and in the process obtained ER relief on the sale of their business could be called upon to repay the ER advantage if their son carried on or started up a business in a similar field within 2 years?  

 

Thanks (0)
avatar
By bumpdinkwhallop
14th Feb 2016 12:51

You would need to look at the detail of the beefed up connected persons provision but the 2nd requiementment in s396b ITTOIA 2005 mentions the within 2 year rule and the connected persons. The clauses are 16 & 17 of part 13 of ITA 2007 'transaction in securities rules and aimed at connected parties.
To answer your question. No if he is disposing for his business assets or if selling shares in his company, but if it was a share buy back for which he recieved a distribution from the company for the shares on a winding up then Yes you would need to be very careful in that situation.

The purpose of the new TAAR is to avoid someone converting income to capital on a winding up. Opening a new company and doing the same again as soon as the shares held meet the criteria. This has been standard practice really for contractor type companies albeit the ESC16 (i think) was reduced to £25k a few years ago

this is only my two bobs worth based on a seminar i watched about it. Click into the links above and read those two articles for a fully grasp of what the changes are trying to achieve.

Thanks (0)
avatar
By bumpdinkwhallop
14th Feb 2016 12:18

I should also say if it was done before April 2016 it no issue either

Thanks (0)
avatar
By BromleyBob
15th Feb 2016 11:19

Discussed elsewhere?

Thanks bumpdinkwhallop, does anyone know if the associated parties point re ER has been discussed elsewhere on accountingweb?

Thanks (0)
By gbuckell
15th Feb 2016 11:31

Tax avoidance

I don't think the associated parties point is that big an issue. As I understand one of the conditions for the new rules to apply is that tax avoidance must be a feature. If a person genuinely winds up a business and an associated person starts up a similar one within 2 years that does not, by itself, cause the new rules to bite. However, it might be examined closely to ensure that it is not a phoenix in disguise!

 

Thanks (0)
Replying to Hugo Fair:
avatar
By BromleyBob
15th Feb 2016 20:53

Relief?

gbuckell wrote:

I don't think the associated parties point is that big an issue. As I understand one of the conditions for the new rules to apply is that tax avoidance must be a feature. If a person genuinely winds up a business and an associated person starts up a similar one within 2 years that does not, by itself, cause the new rules to bite. However, it might be examined closely to ensure that it is not a phoenix in disguise!

Thanks. Do you have any links that would help me to come to a similar understanding that the associated parties point is not an issue?

Thanks (0)
Replying to Jo Nokes:
By gbuckell
16th Feb 2016 10:35

Links

BromleyBob wrote:

gbuckell wrote:

I don't think the associated parties point is that big an issue. As I understand one of the conditions for the new rules to apply is that tax avoidance must be a feature. If a person genuinely winds up a business and an associated person starts up a similar one within 2 years that does not, by itself, cause the new rules to bite. However, it might be examined closely to ensure that it is not a phoenix in disguise!

Thanks. Do you have any links that would help me to come to a similar understanding that the associated parties point is not an issue?

Sorry no - just my humble opinion on the subject.

Thanks (0)
By SteveHa
15th Feb 2016 15:16

I'm surprised any tax adviser is surprised by this. It's kinda critical to know about for tax planning purposes, especially for those sitting on the fence about MVL.

Thanks (0)
avatar
By HeavyMetalMike
15th Feb 2016 16:00

Is this law? Thought it was just a discussion?

Am I out of date on something else?!

 

But looking at the link from the other firm of accts isn't the problem only going to be if we do a MVL and then start a newco within 2 years (that newco then turning the first 10% into something higher?)

Am I missing something?

Thanks (0)
Replying to anahills:
avatar
By cbp99
16th Feb 2016 11:48

.

HeavyMetalMike wrote:

Is this law? Thought it was just a discussion?

Am I out of date on something else?!

The problem is that we have an inbuilt system of retrospective legislation. The new rules will (probably) become law effective as of April 6th, but will not pass onto the statute book until sometime in July when the Finance Act receives royal assent. By that time the details may have changed, and the eventual law may differ from the draft clauses.

So any planning done now is with fingers crossed that the draft rules are a reliable guide to what actually passes into law.

Thanks (0)
By SteveHa
15th Feb 2016 16:09

Yes, you are missing something - the detail of condition two. It is not simply reincorporating within two years that is prohibited. It is trading in the same, or substantially similar field within two years.

If the condition is not met, then the distribution will be treated as Revenue and not capital. Depending on the amount and precise treatment, this could result in a marginal rate of 45%, rather than 10% (more likely 38.1%, but you need to be aware of possibilities).

I strongly suggest you read the official announcements etc. if you are giving any planning advice.

Thanks (0)
avatar
By HeavyMetalMike
15th Feb 2016 16:17

Ouch, SteLacca.

Of course I'm going to read something more official than Aweb in giving advice!

I wasn't aware the condoc was law that's all. I agree re: 2nd leg and similar trade/activity/even doing the same thing if under a proper PAYE job.

That's all.

Thanks (0)
By SteveHa
16th Feb 2016 10:42

You may want to read the ATT's response to the consultation document, and in particular, their comments regarding the associated party rule, which they highlight can make an associated party someone who is surprisingly distant.

 

http://www.att.org.uk/technical/submissions/company-distributions-att-co...

Thanks (0)
Replying to ireallyshouldknowthisbut:
avatar
By bumpdinkwhallop
16th Feb 2016 11:50

Thank you

SteLacca wrote:

You may want to read the ATT's response to the consultation document, and in particular, their comments regarding the associated party rule, which they highlight can make an associated party someone who is surprisingly distant.

 

http://www.att.org.uk/technical/submissions/company-distributions-att-co...

 

That was the view of Robert Jamieson ex preident of the CIOT who done a very recent presentation on the subject too.  Im assuming the ATT and the CIOT view would be very much the same on the matter. Caution urged.  

Thank you very much for this article. I will have  read at it tonight

Thanks (0)
avatar
By Abacus Finch
16th Feb 2016 13:22

Taxline article

Also an article (fairly brief) in the February edition of ICAEW Tax Faculty Taxline publication.

Thanks (0)
avatar
By norstar
16th Feb 2016 13:33

From the horses mouth

I contacted the HMRC guy running the consultation to try and clarify the meaning of associated/same activity etc.

His view was that the purpose of the legislation was simply to legislate & clarify the current rules on phoenixing by introducing a defined 2 year timescale.

Anyone wrapping up a company to go and get a job with a third party should not be caught by the legislation as the prime motive behind dissolving the company was not tax avoidance, but because they had ceased trading."Activity" he said, did mean employment also - not just trading.

Where someone could be caught was if they did so then got a job with a family member.

I pointed out that the legislation didn't say "the prime motive being tax avoidance" but was worded more along the lines of "a main reason being tax avoidance".

In my view, it's still too muddy but HMRC's reasoning is to stop phoenixing companies and so they will seek to apply it where this happens in obvious cases that are "open and shut".

Two years is set because if a company dissolves in Feb 16 say, the tax return reporting this is amendable until 31/1/2018 - so usually plenty of time to do so.

Thanks (1)
Replying to mushroom_dept:
Red Leader
By Red Leader
16th Feb 2016 14:34

please clarify

norstar wrote:

Anyone wrapping up a company to go and get a job with a third party should not be caught by the legislation as the prime motive behind dissolving the company was not tax avoidance, but because they had ceased trading."Activity" he said, did mean employment also - not just trading.

Activity includes employment but gettng a job would not be caught. Isn't that a contradiction?

Thanks (0)
By SteveHa
16th Feb 2016 14:54

My reading of the draft is that being employed within the the same field as the company is most certainly capture. Whether it gets distilled before the FA who can say.

Thanks (0)
avatar
By norstar
16th Feb 2016 14:58

@redleader

No contradiction.

Adrian Coates @ HMRC told me that "activity" in the rules could include employment, which I was concerned about.

However he said if employment counts, "it is important that Condition C is also met" and that the employment would only be relevant if it was via a connected party or via a company in the same way as was evident before. Here is the relevant extract of his reply to clarify:

 

"The actual draft legislation (Clause 18 of the draft Finance Bill 2016, found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/484090/151209_publication_v1_4.pdf) reads:

 

(3) Condition B is that, at any time within a period of two years beginning with the date on which the distribution is made—

            (a) the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company,

            (b) the individual, or a person connected with him or her, is a participator in a company which at that time—

                        (i) carries on such a trade or activity, or

                        (ii) is connected with a company which carries on such a trade or activity, or

            (c) the individual is involved with the carrying on of such a trade or activity by a person connected with the individual.

 

As you can see, there is far more detail in the draft legislation. The first two tests ((a) and (b)) require the person to carry on a trade or be a participator in a company, so both require more than simple employment. The third test is where a person may come within the rules where they are an employee in a related activity after the distribution. Importantly, though, the test actually requires that the involvement is with a connected person.

So, where the employment is with a third party the individual will not fall within the rule, whereas if the employment is with a connected person (say the company of a person's spouse) then Condition B will be met and regard must be had to Conditions A and C."

 

His other email to me had this to say about situations where a company was dissolved and the shareholder went on to gain employment with a third party:

 

"You have separately asked whether 'trade or activity' includes being in employment. I think that employment will count as carrying on the same or a similar trade or activity. However, as with my comments above, meeting Condition B does not in itself mean that the legislation will apply. Where a person ends their own business and liquidates a company, and goes on to act as an employee for an unconnected third party, it would seem unlikely that Condition C would be met."

 

Hope that helps.

Thanks (1)
avatar
By bumpdinkwhallop
17th Feb 2016 12:20

Fantasic

Fantastic comments everyone.

Very helpful for my future reference.

 

Thank you all

Thanks (0)