The Targeted Anti-Avoidance Rule (TAAR) was introduced by the government to prevent ‘phoenixism’, whereby one company is wound up to facilitate a capital payment to the shareholders, in the place of what would otherwise have been income. This is then followed by the formation of a new company rising from the ashes to carry on what is essentially the same trade.
If the TAAR applies, an effective rate of up to 38.1% tax will be payable on the dividend distribution, instead of the 10% rate of capital gains tax that was often achieved on the capital distribution.
HMRC’s long awaited TAAR guidance was released on 6 July 2017 and can be found here.
The guidance is surprisingly sparse, particularly given the persistent delays leading up to the final release date.
Conditions A and B required little guidance as they are a matter of fact; the shareholder concerned must have at least a 5% interest and the company must have been a close company at any point in the last two years for the TAAR to apply.
Condition C applies if the individual receiving the distribution will be involved in the same or similar trade, but the guidance deliberately fails to define the terms ‘involved in’ and ‘similar trade or activity’ and so we are left to draw our own conclusions.
Condition D provides the ‘get out’ where there is a commercial purpose, but the examples provided do not go into any depth to consider more common scenarios that arise in practice. In particular, there is a distinct lack of clarity for the property development trade scenarios that we are often asked to advise on.
What next? Francis Clark Tax Consultancy are assisting our clients to provide analysis of the likely outcome for any proposed liquidation in advance of the transaction. Please contact Stuart Rogers or Tania Donald for further information.