The targeted anti-avoidance rule (TAAR) to prevent tax advantage arising when a company is dissolved, but the trade carries on in a similar form, can be difficult to apply with certainty. HMRC has been slow to provide the clarity requested.
As Pete Miller explained in 2016, where an individual receives a distribution in the course of the winding-up of a company, the anti-phoenixing TAAR will recharacterise any gains as income, rather than capital, when four conditions are met. These conditions, set out in full at s 396B ITTOIA 2005, are summarised as follows:
- Condition A: the individual held at least 5% of the shares in the company immediately before the winding up;
- Condition B: The company was a close company at some point during the two years ending with the winding up;
- Condition C: The individual continues to carry on, or be involved with, the carrying on of the same trade or a similar trade within two years following the date of the distribution; and
- Condition D: It is reasonable to assume that the main purpose, or one of the main purposes, of the winding up was the avoidance or reduction of a charge to income tax.
Distributions of irredeemable shares are outside the scope of the TAAR. When the legislation was first introduced in Finance Act 2016, widespread concern was expressed over the degree of subjectivity inherent in applying conditions C and D and a perception that the TAAR could apply where no tax avoidance was intended.
Subsequent HMRC guidance (introduced more than a year after the legislation came into force) did little to alleviate this concern, and in late 2017 the CIOT, ATT and ICAEW all submitted open letters to HMRC requesting further clarification and examples to illustrate how the legislation would apply in practice.
What has changed?
On 25 July 2018, HMRC made a number of updates to its guidance on the TAAR in its Company Taxation Manual. These are described as follows.
The commentary on Condition C (CTM36330) has been revised so that references to being “involved with” a trade now refer to being “involved with the carrying on of” a trade. This change brings the wording of the guidance in line with the legislation, although this is principally a cosmetic improvement, rather than one with any meaningful instructive benefit.
The remaining changes update the guidance on the ‘main purpose’ test (condition D) at CTM36340 to clarify that:
- a decision not to pay an income distribution before the winding-up does not mean that condition D is automatically met;
- an individual is required to self-assess based on their own knowledge of the purpose of the winding-up, and HMRC can only displace this self-assessment where the individual’s self-assessment is not reasonable;
- condition D must be assessed by reference to intentions at the time the decision was made to wind up the company, but HMRC will treat events occurring after the winding up as evidence of those intentions and want to look at all available evidence when assessing the main purpose;
- condition D is less likely to be met where an individual remains ‘involved with the carrying on’ of a trade solely as an employee with no decision-making power or influence.
Whilst some reassurance can be gained from these updates, they are arguably confirmations of ‘common sense’ points that are unlikely to be of great help in practice: what real insight does, say, point (iv) provide in more marginal cases?
Where are we now?
As things stand, the more fundamental uncertainties highlighted by the professional bodies noted above remain largely unresolved.
For example, the CIOT and ICAEW have both noted that these ambiguities raise particular concerns for the property sector, in which individual developments are often structured within separate, standalone companies. Where an individual property developer holds a direct interest in many such companies (rather than through a holding company), would HMRC view this as inherently tax-motivated? For now, HMRC’s manuals are silent on this and many other scenarios for which more explicit guidance would be welcome.
It remains to be seen whether more substantive clarifications will be provided in the future.
About Rob Harness
Rob Harness is a senior corporate tax manager at Blick Rothenberg, with a focus on advising large and growingowner-managed businesses and their shareholders. He has particular expertise in corporate structuring,transactions and reorganisations, property tax matters, and R&D relief.