beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Company Taxation Manual

Particular topics: company winding up TAAR: targeted anti-avoidance rule (TAAR)

ITTOIA05/S396B/404A

 

The purpose of ITTOIA05/S396B is to prevent individuals converting what would otherwise be a dividend into a capital payment, and so reducing their overall tax liability.  This provision and ITTOIA05/S404A (see below) apply to distributions in a winding-up made on or after 6 April 2016, regardless of when the winding-up commenced.

Example

Mr J is a dance instructor who runs his business through his own company. At the end of each year, instead of paying himself a dividend (which would be liable to Income Tax), Mr J winds up his company and receives the profits as a distribution in a winding up, liable to Capital Gains Tax. He then immediately creates a new company and continues his dance instruction business

This practice is often known as ‘phoenixism’ (because the new company rises from the ashes of the old).

Targeted anti-avoidance rule (TAAR)

A distribution in a winding up made to an individual on or after 6 April 2016 will be treated as if it were a distribution where certain conditions are met. For the rule to apply, all of the following conditions must be met:

  • Condition A: The individual receiving the distribution had at least a 5% interest in the company immediately before the winding up
  • Condition B: the company was a close company at any point in the two years ending with the start of the winding up
  • Condition C: the individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution
  • Condition D: it is reasonable to assume that the main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to Income Tax.

 

A distribution in a winding up is not treated as a distribution under S396B to the extent that the amount of the distribution does not exceed the amount that would result in no gain accruing for the purposes of Capital Gains Tax, or where the distribution is of irredeemable shares.

 

Non-UK resident companies

ITTOIA05/404A applies the same treatment where an individual receives a distribution in a winding up from a company that is non-UK resident (although it taxes the receipt as a dividend rather than a distribution because of the difference in wording between ITTOIA05/S383 and ITTOIA05/S402).