When you close or sell your business, you may want to start up a new venture. Before we give your new idea our full blessing we should sit down with you and discuss the anti-avoidance rules which could kick in to foul-up your plans.
HMRC are alive to the issue of phoenix companies. This is when one company is closed down and liquidated, with the accumulated cash subject to CGT, then the same owner starts another business running a very similar trade.
The targeted anti-avoidance rule (TAAR) in ITTOIA 2005 s.396B and s.404A, can apply if the person who receives the distribution from the liquidated company starts up a similar trade or activity (not necessarily in a company) within two years of the liquidation. It must also be reasonable to assume that the main purpose, or one of the main purposes, behind winding up the company was to reduce that person’s income tax liability.
When the TAAR applies the distribution from the company is subject to income tax rather than CGT. However, in Spotlight 47 HMRC declared that the TAAR can also apply when the original company is sold rather than liquidated by the owners. This approach does not find full agreement within the tax profession.
There will be a range of circumstances between; selling the company with no intention to work in the area again, and disposing of the assets and trade out of the company then selling the cash-rich shell to a third party to liquidate. In the later case HMRC may invoke the general anti-abuse rule (GAAR) to counter the perceived tax avoidance.
When planning any death and rebirth of a business, take advice in advance of the transaction.
Written by the Tax Advice Network