News added on 20.08.2018

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Corporation tax

HMRC updates TAAR guidance for close company distributions on winding up

HMRC has updated the targeted anti-avoidance rule (TAAR) guidance in relation to distributions from close companies on winding up. What do you need to know?

Background. The TAAR is in place to prevent individuals from liquidating a company and then continuing in a similar trade in order to treat distributions as capital rather than income for tax purposes. The legislation outlines four conditions which, if met, result in the distribution on winding up being taxable as income.

Concerns. The Association of Taxation Technicians requested an expansion of HMRC’s guidance late last year, noting that the guidance was "disappointingly brief". They placed emphasis on the lack of clearance procedures for TAAR and the subjective nature of the legislation - especially Condition D. It was felt that more detailed examples of how the TAAR would apply in practice would assist taxpayers who are forced to self-assess in this area.

What has been updated? HMRC has finally updated the Company Tax Manual guidance to provide clarity in respect of Condition D, the "main purpose" test. The guidance now confirms that:

  • A decision by a company and its shareholders not to make an income distribution prior to the company being wound up does not, by itself, mean that the main purpose test is met.
  • The individual will know their purpose and, if fairly described, can be confident that there will be enough supporting evidence for an officer to arrive at a sound conclusion when applying the test of whether it is "reasonable to assume" that a main purpose of the winding up or the wider arrangements was the avoidance or reduction of a charge to income tax. The individual should self-assess on that basis. HMRC can only displace this self-assessment where the individual’s decision is not reasonable.
  • The main purpose test is applied by reference to intentions known at the time the decision was made to wind up the company. However, this will be evidenced by what happens after the winding up occurs and it is likely that, in order to test assertions in relation to the main purpose, officers will review all available evidence.

The relevant HMRC manuals can be found here https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm36300.

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