At what point do the TiS rules bite?

Irregular dividends policy. When will HMRC start sniffing?

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A PSC company client (sole director/shareholder) has been trading for about 3 years. Profits circa £100K p/a. The director is independently wealthy so is able to live off his investment income, therefore his drawings from the company have been frugal; an annual salary (just at the NI limits) and end of year dividends fluctuating between £5K and £10K. This just so happens to minimise his annual income tax liability, but it can't be said that the retained profits are required as working capital. In anticipation of a winding up at some point in the not-too-distant future, I am wondering what HMRC will look for when considering the Transactions in Securities rules. Surely he can't be expected to draw all the distibutable income each and every year, but what would be acceptable to take HMRC off the scent? Thanks.

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By taxdigital
03rd May 2024 08:23

Can you let the readers know, with reference to legislation, specifically which part of the TiS legislation is invoked in this case? (2 marks!)

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Replying to taxdigital:
By SteveHa
03rd May 2024 11:50

I, too, would be interested.

As I read the question, I thought, "What has TiS got to do with it".

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Replying to SteveHa:
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By Software Seeker
03rd May 2024 18:11

SteveHa wrote:

I, too, would be interested.

As I read the question, I thought, "What has TiS got to do with it".

S684(2)(f)ITA2007.

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Replying to taxdigital:
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By Software Seeker
03rd May 2024 18:09

taxdigital wrote:

Can you let the readers know, with reference to legislation, specifically which part of the TiS legislation is invoked in this case? (2 marks!)

S684(2)(f)ITA2007.

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By Matrix
03rd May 2024 12:03

Companies are not required to distribute all profits each year but do you mean the Substantial test?

https://www.taxinsider.co.uk/substantial-what-is-it

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Replying to Matrix:
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By Software Seeker
03rd May 2024 18:10

Matrix wrote:

Companies are not required to distribute all profits each year but do you mean the Substantial test?

https://www.taxinsider.co.uk/substantial-what-is-it

TiS legislation at S684(2)(f)ITA2007 (aka "moneyboxing")

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By kim.shaw-and-co.com
03rd May 2024 13:06

If the company is liquidated via MVL the distributions to shareholder(s) will amount to capital distributions, provided 'anti-phoenixing' provisions in s684 ITA07 do not bite.

The overall issue is summarized nicely in this article : https://www.taxinsider.co.uk/living-with-the-anti-phoenix-rule-part-ta

It is actions subsequent to the liquidation by the person(s) receiving the distribution that are relevant rather than the level of distributed reserves (versus the OMB's previous salary) from a single undertaking in respect of activities that an individual ceases to be involved with permanently following a MVL.

If contracts giving rise to the company's reserves were within the scope of IR35 then there is a completely different issue to consider than the "TiS legislation" !

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Replying to kim.shaw-and-co.com:
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By Software Seeker
03rd May 2024 18:18

kim.shaw-and-co.com wrote:

If the company is liquidated via MVL the distributions to shareholder(s) will amount to capital distributions, provided 'anti-phoenixing' provisions in s684 ITA07 do not bite.

The overall issue is summarized nicely in this article : https://www.taxinsider.co.uk/living-with-the-anti-phoenix-rule-part-ta

It is actions subsequent to the liquidation by the person(s) receiving the distribution that are relevant rather than the level of distributed reserves (versus the OMB's previous salary) from a single undertaking in respect of activities that an individual ceases to be involved with permanently following a MVL.

If contracts giving rise to the company's reserves were within the scope of IR35 then there is a completely different issue to consider than the "TiS legislation" !

Thanks. S684(2)(f)ITA2007 specifies that distributions in respect of companies being wound up are included in the TiS rules. The anti-phoenixing rules are at S396B ITTOIA2005.

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Replying to Software Seeker:
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By kim.shaw-and-co.com
04th May 2024 00:42

You are correct ! Poor referencing on my part there ... through the procedures for counteraction of an advantage arising flow from the TiS provisions in Part 13, Chapter 1 of ITA07.

A counteraction notice is HMRC's response to 'moneyboxing' in cases where they consider an individual has been involved in the same or a similar business within 2 years of receiving the distributions from a liquidation.

Moneyboxing in this context may result from retention of undistributed reserves surplus to the operating requirements of a company, but there is nothing to say that will result in counteraction unless the individual(s) continue involvement in the same or a similar business following the liquidation - which of course they could not if they wished to retain benefits of distribution(s) received being taxed as chargeable gains.

If a counteraction is appropriate, the capital distributions effectively end up taxed as income distributions (dividends) instead after due process. There's no relationship with the level of salary vs dividends which may have been paid (or not paid) pre-liquidation.

Unless contracts performed through a PSC ought to have been treated as being within the scope of IR35 (and in that case the issue would be one of deemed employment income arising under the original contracts) these issues concern capital receipts versus taxable distributions.

Repeat instances of liquidation of close companies (or employment/self-employment/"involvement" in the same or a similar sector within two years) carry a relatively high risk of triggering an enquiry (within six years of the end of the year to which the income tax advantage relates following s695 ITA 2007). There is no need for HMRC to have regard to assessing time limits associated with amounts or any attempt to include 'protective' disclosures included in a SATR.

If a taxpayer wants to, they can seek clearance under the s701 procedure : https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm36845

However, any undisclosed or incomplete facts render such clearances 'null' and therefore the potential value of an application, particularly in this area, is likely limited if future actions are capable of changing the basis on which any conclusions are reached.

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Replying to kim.shaw-and-co.com:
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By Software Seeker
08th May 2024 17:54

Thanks very much. Very helpful.

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By taxdigital
04th May 2024 10:20

Software Seeker wrote:

taxdigital wrote:

Can you let the readers know, with reference to legislation, specifically which part of the TiS legislation is invoked in this case? (2 marks!)

S684(2)(f)ITA2007.

Well, your answer, unfortunately, earns no marks as anyone in the tax profession would know, post the 2016 amendment, that liquidation is very much within the TiS radar. I was expecting you to comment on how s.684(1)(c) should be in point given the facts given in the OP. In other words, why do you think the main purpose, or one of the main purposes, of what you have said in your OP is to obtain an income tax advantage?

Money-boxing

Way before the off-payroll legislation kicked in, there was this liquidation ‘boom’, engineered by one-man companies claiming the 10% favourable tax rate. HMRC then came out with a consultation towards the end of 2016 (see below) highlighting two concerns: ‘phoenixism’ and ‘moneyboxing’ (page 8). Fast forward to 2024 and all I know is that ‘phoenixism’ was countered with two pieces of legislation (s.396B and 404A ITTOIA) finding their way to the rule book. There was no news about moneyboxing ever since. However, I do know that HMRC did indicate at various forums those days that it was not their intention to counteract companies dying a natural death (liquidation).

I, for one, don’t think HMRC, or even Courts for that matter, can determine what should the ideal working capital level be, for a business. Infringing on the freedom aside, I don’t expect HMRC to come out with a one-size-fits-all formula (like the Duckworth-Lewis one in cricket!) for working capital levels that can be universally applied to millions of businesses operating in diverse business sectors and environments!

As for the 80/20 rule on liquidation, BADR etc I think the position is fairly clear now after some of the recent decisions.

__________________________________________
2015 consultation:
https://assets.publishing.service.gov.uk/media/5a80c9cf40f0b62305b8d279/...

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Replying to taxdigital:
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By Software Seeker
08th May 2024 17:56

Ah, go on, give me half a mark at least for effort :-)

Thanks for your informative reply.

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Replying to taxdigital:
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By More unearned luck
08th May 2024 18:31

"I, for one, don’t think HMRC, or even Courts for that matter, can determine what should the ideal working capital level be, for a business."

In effect, they do for BPR. See IHTM25352.

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