I'd be grateful if someone could settle a debate in the office.
A client ceased trading and has prepared cessation accounts to the end of the month in which they ceased trading. The client withdrew £20k during the year, but no dividends were voted, as there was a sufficient DLA balance to draw funds from (£60k). However, there were closing trade debtors of £35k which were paid into their personal account, and £25k cash at bank. The bank has already been closed and funds transferred to the director.
The primary reason for winding up is they are moving overseas, so at first glance condition D of TAAR seems to be satisfied, therefore the remaining reserves can be treated as a capital distribution. However, ctm36305 states "The purpose of ITTOIA05/S396B is to prevent individuals converting what would otherwise be a dividend into a capital payment, and so reducing their overall tax liability.". So the winding up isn't primarily to achieve a tax advantage, but the decision to not vote dividends is.
I have 2 questions:
1) Does the decision to not vote a dividend constitute failure of condition D, therefore cannot be treated as part of the capital distribution? The following ICAEW article states "HMRC has indicated that the decision not to pay out a pre-winding up dividend will not normally be regarded as tax avoidance for this purpose" but I can't find any guidance confirming this.
2) Assuming no to question 1, the effect of not voting a dividend is that the DLA becomes overdrawn post-year end. £60-20-35-25=£20k overdrawn. Is this to be treated as an income distribution per s.415 ITTOIA05 ?. I assume that not going through the formal liqudiation process and not drawing accounts up to later date does not change anything.
Thank you everyone in advance for your time and comments.