Uncertain times for winding up transactions
The current focus on preventing tax avoidance to make sure everyone pays their fair share is understandable but any legislation that is drafted on a wide-ranging basis creates uncertainty for people who should never be affected by the proposals.The new provisions on liquidation distributions is a case in point. A complication is that the recipients of those distributions have to decide on whether or not they are caught as the requirement is for the tax to be paid via the normal self-assessment return. There is no clearance procedure and HMRC’s detailed guidance is not yet published.
The desire may be to stop people running one-person companies for three years with salaries and dividends up to the tax free amount and then winding up with all retained profits being taxed at a 10% capital gains tax rate. However, unfortunately the new legislation catches rather more people than just that group.
Under the new law distributions on a winding up are potentially taxed as income not capital where the company was controlled by five or fewer people; the recipient held at least 5% of the share capital and within two years of the distribution the individual or a person connected with them carries on a trade or activity similar to that previously carried on by the company. Those tests would catch a lot of distributions but at least are factually based so the answer is clear. Unfortunately the final test that provides a let out (or not) is rather more subjective – “it is reasonable to assume that the avoidance or a reduction of income tax is a main purpose of the transaction”.
HMRC has offered some examples, details can be found on the ICAEW website.
The best advice is to keep records and evidence. Take minutes of meetings discussing why the company needs to be wound up and the commercial reasons for this.Follow up discussions by email and keep a paper trail – contemporary evidence is much more convincing than unsubstantiated recollections. In addition, take professional advice which also helps to demonstrate that you have done all you can to arrive at the right answer if challenged by HMRC.
To discuss this further please get in touch with Cathy Corns or your usual Mercer & Hole contact.
Date: 20th July, 2017
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