Simmons Gainsford Chartered Accountants Taxation distributions from Liquidations

Taxation of distributions from Liquidations

On 9 December 2015, HM Revenue and Customs (“HMRC”) issued a consultation document concerning proposed changes to the taxation of distributions from companies.

Having previously addressed the question of income tax in relation to company dividends, with the removal of the dividend tax credit and broadly an increase in dividend income tax rates of 7.5%, HMRC has now concentrated its focus on arrangements which convert income to capital.

There are three principal scenarios which HMRC has in its sights, namely:

  1. the inclusion in third party sales of retained profits which may otherwise have been paid out in dividend form had the company not been sold;
  2. members voluntary liquidations of companies; and
  3. repayments of share capital, including a company purchase of its own shares.

HMRC proposes that points (i) will be dealt with by a strengthening of existing anti-avoidance legislation, which will also bring this more within the general administration of tax under Self-Assessment.

With regard to a company purchase of own shares, the consultation document goes no further than suggesting that the current de minimis requirements are perhaps too generous, and invites responses on this point.

Probably the most important aspect of this consultation document is the proposed introduction of a new Targeted Anti-Avoidance Rule in relation to distributions on a winding up.

It is proposed that such distributions by “close companies” (broadly those under the control of five or fewer participators) will be subject to income tax, where within two years after the winding up, the shareholder continues to be involved in a similar trade or activity and one of the main purposes of the liquidation was obtaining a tax advantage.

The draft legislation makes it clear that the two year time limit starts from the date of the distribution and will catch not only the shareholder but also persons connected with him or her.

What should I do?

Some thought should be given to how future transactions may be organised so as not to fall within this new anti-avoidance provision.

It is also imperative that all existing arrangements are reviewed as a matter of urgency and where possible, action is taken to accelerate transactions so that they fall within the current regime.

There are no anti-forestalling provisions contained in the draft legislation which was published alongside the consultation document, and the consultation period will run until 3 February 2016.

It is therefore likely that any necessary action will need to be made by 5 April 2016, although it may be more prudent to complete company sales, or liquidation distributions by 16 March 2016 (the date of the 2016 Budget) if possible.

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