Policy paper

Corporation Tax, Income Tax and Capital Gains Tax: company distributions

Published 9 December 2015

Who is likely to be affected

Some shareholders of close companies who receive a payment from the company which is taxed as a capital gain instead of as income, where the purpose of the transaction (or one of the main purposes) is to obtain a tax advantage.

General description of the measure

The measure will strengthen the Transactions in Securities rules, which are designed to prevent a tax advantage from being obtained where a transaction is carried out where a main purpose, or one of the main purposes, of a party to the transaction is to obtain a tax advantage.

It will also introduce a new Targeted Anti-Avoidance Rule (TAAR), which will apply to distributions in a winding-up where certain conditions are met.

The draft legislation will accompany a consultation which will discuss the distributions legislation more broadly.

Policy objective

This measure will restrict the opportunities for shareholders to convert to capital what might otherwise be paid as an income distribution (most commonly a dividend). The incentive for this type of behaviour will increase from 6 April 2016 when changes are made to the way in which dividends are taxed.

Background to the measure

At Summer Budget 2015 the government announced that it would publish a consultation on company distributions rules. The consultation is now being published. It is accompanied by draft legislation that introduces and amends rules to protect the company distributions rules.

Detailed proposal

Operative date

The measure will have effect from 6 April 2016.

Current law

Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) imposes charges to income tax on most dividend income and certain other types of distribution. The definition of “distribution” for this purpose is at Part 23 of the Corporation Tax Act 2010 (CTA). The rates of income tax paid on dividends and other distributions are provided by section 8 of the Income Tax Act 2007 (ITA).

Section 1030 CTA 2010 provides that a distribution in respect of share capital from a winding-up will not be a distribution for the purpose of Part 23.

Part 13 of ITA 2007 is aimed at counteracting income tax advantages from transactions in securities. The rules are designed to address situations where an income tax charge has been avoided on company distributions.

Proposed revisions

New Targeted Anti-Avoidance Rule (TAAR)

Legislation will be introduced in Finance Bill 2016 to amend ITTOIA and implement a new TAAR. The TAAR will treat a distribution from a winding-up as if it were an income distribution for the purpose of section 1000 CTA 2010 where certain conditions are met.

These conditions are:

• an individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up
• within a period of two years after the distribution, S 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

The rule will not apply where the only asset distributed during the winding-up is shares in or securities of a company which is a subsidiary of the wound-up company.

Changes to Transactions in Securities legislation

Legislation will also be introduced by Finance Bill 2016 to amend ITA 07 to make certain changes to the Transactions in Securities rules in Part 13.

These changes will amend:

• section 686 within Part 13 (fundamental change of ownership) so that the requirements of a fundamental change consider the overall economic interest rather than simply direct ownership of the target company
• section 687(2) to clarify that the amount that could be paid to a person as a distribution should include the reserves of group companies
• section 694 so that an income tax advantage can be obtained where a distribution could not be paid to the person, but one could be paid to the person’s associate
• section 684(1)(c) so that it considers the purpose of the transaction(s) and not of the person in being a party to the transaction
• section 684(2) so that it includes distributions in liquidation and repayments of share capital or premium
• the compliance procedure in section 695 to 697

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
-	negligible	+35	+20	+15	+10

These figures are set out in Table 3.1 of Autumn Statement 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2015.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The costing accounts for a behavioural response whereby taxpayers will find ways to reduce their tax burden as a response to this change.

Impact on individuals, households and families

These changes will only affect transactions that are carried out with a main purpose of obtaining a tax advantage.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

Equalities impacts have been considered and none have been identified.

Impact on business including civil society organisations

This measure will have no impact on businesses and civil society organisations who are undertaking normal commercial transactions; it will only impact on the businesses that are restructuring with the main purpose of obtaining a tax advantage.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

HMRC does not expect to incur any extra costs in implementing this change.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through monitoring of disclosures of new avoidance schemes to circumvent the measure, and through communication with taxpayers and practitioners affected by the measure.

Further advice

If you have any questions about this change, please contact Adrian Coates on Telephone: 03000 586041 or email: adrian.coates@hmrc.gsi.gov.uk.