Share this content
0
821

Phoenixism and the TAAR

Exposure

Didn't find your answer?

Search AccountingWEB

I have a client who has, over four or five years, refurbished a listed building and turned it into appartments.  The project is now over and he now wishes to close down the company through an MVL and claim ER on the proceeds.

He does have three rental properties, held personally, which he has held for three, six and ten years respectively.  He intends to keep these, although, should a tenant leave, he might consider selling a property, instead of re-letting.  He may buy another in its place or add to his portfolio.

Does anyone disagree that this is a different type of trade to the one run by the company ?  Imho, he is not caught by the TAAR but this is relatively new legislation and there's not much of a track record at the moment.

Replies

Please login or register to join the discussion.

avatar
30th Mar 2019 16:59

No idea about the MVL/ER point but I don't see that having property investments and carrying on property trading cannot co-exist - even without separate ownership structures. Obviously records would be key.

Was the refurbishment intended as a trade for profit or development to let?

Thanks (1)
to Accountant A
30th Mar 2019 17:03

The company's project was always intended as a trade for resale.

The properties owned by him were always intended for rental though they've been tidied up a bit. Minor repairs, redecoration, fences mended - that sort of thing.

Thanks (0)
avatar
to lionofludesch
30th Mar 2019 17:10

lionofludesch wrote:

The company's project was always intended as a trade for resale.

The properties owned by him were always intended for rental though they've been tidied up a bit. Minor repairs, redecoration, fences mended - that sort of thing.

Facts look safe then. I would have thought that one being in a company and the other personal should clinch it. Operating via a company isn't prima facie an indicator of tax avoidance so no idea how HMRC might seek to recategorise.

Thanks (1)
avatar
By Matrix
30th Mar 2019 17:23

Is the purpose of closing down the company to gain a tax advantage? I believe this has to exist for the TAAR to apply, although I am no Portia.

Thanks (2)
to Matrix
30th Mar 2019 17:35

Well, that's an interesting debate. Difficult to prove these things but the fact is he could probably pay less tax taking the money out as dividends (tax at 7½%) if he was prepared to take it out over a couple of tax years.

One of his motives is to put a lid on any possible claims, so he says. But the fact is there's a 12-year warranty with an external company so there shouldn't be any claims. Hard to say that's much of a risk.

Thanks (0)
avatar
By Matrix
to lionofludesch
30th Mar 2019 17:48

Lion I don’t think your client’s situation is one that it was designed to catch anyway, don’t you have to set up a second company with a similar activity within 2 years?

It does not look tax driven in any case.

Thanks (1)
to Matrix
30th Mar 2019 17:52

Matrix wrote:

Lion I don’t think your client’s situation is one that it was designed to catch anyway, don’t you have to set up a second company with a similar activity within 2 years?

It does not look tax driven in any case.

No - it doesn't need to be corporate, a sole trade will be caught, too. But I'm minded to agree that the rental business isn't caught here.

Thanks (0)
to Matrix
30th Mar 2019 17:54

I agree. Although as I note below the legislation does in theory catch existing activities - the requirement is only that the individual carries on a similar activity within 2 years, there is nothing that says that the activity has to be a new one started within that 2-year period (although that is what phoenixism, the purported target of the legislation, actually is).

Thanks (1)
to Wilson Philips
30th Mar 2019 18:04

Wilson Philips wrote:

I agree. Although as I note below the legislation does in theory catch existing activities - the requirement is only that the individual carries on a similar activity within 2 years, there is nothing that says that the activity has to be a new one started within that 2-year period (although that is what phoenixism, the purported target of the legislation, actually is).

I agree that the legislation covers a wider range of activities that starting a company within the two years following the final distribution. Hence the question.

Thanks (0)
to Matrix
30th Mar 2019 17:48

Surely the main purpose of winding up the company is to get rid of a company that is no longer required, thus avoiding unnecessary future compliance costs?

Thanks (1)
30th Mar 2019 17:41

I would say that they are more than a different type of trade - one isn’t even a trade!

(I know that section 396B of ITTOIA 2005 refers to “trade or activity” but in my mind the fact that one is a trade and the other is not is sufficient. I also think that although the legislation does in theory catch an existing second activity, it is intended to catch the situation where one activity ceases and another starts. My personal view is that your client has little to worry about.)

Thanks (1)
to Wilson Philips
30th Mar 2019 17:37

True - could be seen as a business but not a trade.

Thanks (0)
avatar
30th Mar 2019 18:13

Condition C :

Condition C is that, at any time within the 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 or an effective 51% subsidiary of the company

I think it is largely irrelevant that the rental properties are held personally.

I don't think, however, that a trade of buying, converting and subsequent sale of a property is 'similar' to that of property letting. I suppose they could always argue that it is, but I doubt that such an argument would hold any weight.

As Matrix points out, condition D States that it must be reasonable to assume 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.

In my opinion, the reduction of tax is clearly not the main purpose here, but is purely a symptom of the main purpose, which is to wind up a company that has served its purpose and is no longer needed. There are no more properties to sell (presumably) and so it is reasonable to close down the company.

No doubt we will see test cases within a few years. I don't know if any as yet.

Just my thoughts.

Edit: bloody website, I missed the fact that a load of further replies had already been made. I had thought there were only 3 replies.

Thanks (0)
avatar
31st Mar 2019 12:24

As an aside, the change to 2 years could make it difficult for a property conversion company to qualify for ER. Buying and converting isn't trading - it's preparing to trade.

Thanks (0)
to Tax Dragon
31st Mar 2019 12:41

I respectfully disagree. The conversion is the trade, the sale simply being the endpoint of the process. Would you say that a company purchasing raw materials to process is pre-trading?

In any event (although I’d need to check) I believe that pre-trading activity is taken into account when determining whether a company is a trading company or not. (The corollary is that a company can be carrying on a trade without being a trading company for ER purposes.)

I’ve checked - it’s section 165A(4) of TCGA 1992.

Thanks (0)
avatar
to Wilson Philips
31st Mar 2019 12:47

The legislation renders my out loud ponderings irrelevant.

My (ponderous) analogy is always a corner shop. I was taught that trade commences when it opens its doors for the first time. Was my education suspect, or is it the way I apply it?

Thanks (0)
avatar
to Wilson Philips
31st Mar 2019 13:17

So....

Wilson Philips wrote:

Would you say that a company purchasing raw materials to process is pre-trading?

potentially I would, yes. It's not relevant for ER, but this is still an important point. Trade isn't meaningfully defined in the legislation, but the dictionary talks about buying AND selling - so opening the shop's doors, or being in a position to sell (which does not necessarily need the flat to have been converted, or the manufacturing process to have been completed- but it might) does seem to be a prerequisite.

Thanks (0)
to Tax Dragon
31st Mar 2019 15:05

Quite an interesting discussion. I see the dictionary definition as referring to a trading transaction, ie with a buyer and seller, as opposed to the trade itself.

It is after all quite possible to have a trade (or profession) without buying anything

I do make a distinction between acquiring stock for resale and commencement of a manufacturing process.

Thanks (0)
avatar
to Wilson Philips
31st Mar 2019 15:51

Wilson Philips wrote:

Quite an interesting discussion.

Glad you agree. I guess though that either the answer isn't important (and I was wrong to say it is) or there's surely case law on something so fundamental, which would save us further head-scratching.

Personally I don't see the distinction you draw - at least, not fundamentally. Take a chest of drawers in a furniture shop. You're saying that the date the trade started depends on whether the piece was bought or self-made.

Thanks (0)
Share this content