HMRC have released Spotlight 47: Attempts to avoid an Income Tax charge when a company is wound up, warning about tax avoidance schemes that try to avoid an Income Tax charge on distributions when winding up a company.
This follows the introduction of the new Targeted Anti-avoidance Rule (TAAR) from 6 April 2016 which stop individuals from gaining a tax advantage by winding up companies, and ensure any distribution in the winding up is taxed as income instead of capital.
In the Spotlight HMRC warn that there are schemes available which claim to get around the TAAR legislation by artificially modifying those arrangements which the rules target, for example, by selling the company to a third party instead of winding it up.
HMRC consider that these schemes do not work, and will consider whether the General Anti-Abuse Rules (GAAR) apply to them, which could result in a 60% penalty. HMRC say:
- In many cases, the actual outcome is that the individual is receiving distributions in a winding up; they carry on trading using a different vehicle therefore the schemes are caught by the TAAR legislation.
- Phoenixism arrangements that claim to involve payments to shareholders taxed as capital instead of income will be caught by the TAAR or other provisions.
HMRC advise taxpayers who have used one of these schemes to declare income distributions received in their tax returns and, if time limits have passed to amend returns, to settle with HMRC by contacting them at:
Links to our guides:
TAAR: distributions on winding up (anti-phoenixing rules)
A detailed guide to the TAAR setting out what is caught by it and what the consequences are.
TAAR tool
Our Virtual Tax Partner service has created a TAAR tool which takes all the pain out of checking this important rule.
General Anti-Abuse Rule – GAAR
This guide looks at the key features of the General Anti-Abuse Rule (GAAR), what areas of tax it covers and what you need to know about the provisions it contains when considering tax planning.
Penalties: GAAR
A guide to the penalties applying when a taxpayer submits a return, claim or document to HMRC which includes arrangements which are found to come within the General Anti Avoidance Rules (GAAR).
External links:
Spotlight 47: Attempts to avoid an Income Tax charge when a company is wound up