From 6 April 2016 distributions made to individuals on the winding-up of a close company can be subject to a targeted anti-avoidance rule (TAAR). This TAAR seeks to charge income tax rather than CGT on the distribution if four conditions are met, as we outlined in our newsletter on 25 August 2016.
The four conditions are briefly:
- The individual holds at least a 5% interest in the ordinary share capital and voting rights of the company;
- The company is close company or has been within the last two years before the winding-up;
- The individual who receives the distribution is directly or indirectly involved in the same or similar trade or activity as the company, within two years after the distribution; and
- The main purpose of the winding-up, or one of the main purposes, is to reduce income tax payable.
The difficulties in applying the TAAR lie with identifying in Condition C what constitutes; “directly or indirectly involved with” and “same or similar trade or activity”.
HMRC has just published guidance on this TAAR in its Company Taxation Manual at CTM36300 – CTM36350, but the examples given do not clearly define the scope of the phrases in Condition C.
HMRC say that “similar trade or activity” is deliberately wide, and provide an example of a landscape gardener who switches to providing gardening services, which is a similar activity. The guidance on the meaning of “involved with” is even less helpful, as the activities of people connected with the person who receives the distribution must also be considered.
In all cases condition D (the tax-saving motive) must also be met for the distribution to be caught by the TAAR, so if you can show there was no intention to reduce income tax, the TAAR doesn’t bite. If you need any further advise on this matter please contact our office.