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Distributions in a winding up - continued uncertainty

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In the latest UK200Group blog post, Mike Chapman, Senior Manager, Corporate Tax, Knill James Chartered Accountants explores the lack of clarity surrounding distributions in a winding up.

The 2016 Finance Act introduced a new Targeted Anti-Avoidance Rule (TAAR) in respect of the tax treatment of company distribution in a company winding up which potentially has far-reaching consequences for shareholders. Where the TAAR applies, liquidation distributions will be treated as income in the hands of shareholders rather than, as used to be the case, a distribution of capital. The conditions are:

• An individual, who owns at least a 5% interest in a close company, receives from the company a distribution in respect of shares in a winding-up

• Within a period of two years after the distribution, the individual continues to be involved in a similar trade or activity

• The circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage

Widely different tax rates could be charged depending whether or not the TAAR applies. If the distribution is capital and CGT Entrepreneurs Relief applies, the tax rate could be as low as 10% whereas tax on income could be as high as 38.1%.

Tax practitioners see that certain commercially motivated transactions could well be caught by the TAAR because of the lack of precision in the legislation. In particular, what does the phrase ‘a similar trade or activity’ mean in practice? HMRC guidance to date has been very sparse and the promised technical guidelines which were due to be issued before Christmas 2016 have still not been forthcoming.

To compound matters, HMRC have stated that there will be no clearance facility to obtain rulings on the application of the TAAR. Without clear direction from HMRC, important commercial decisions are being put on hold and in the current political hiatus there is no expectation from taxpayers or their advisers that the uncertainty will be resolved any time soon.

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