Ken Moody highlights a ‘Spotlight’ published by HMRC on the anti-avoidance rules aimed at combatting ‘phoenixism’.
HMRC released number 47 in its ‘Spotlight’ series of guidance notes in February this year, which suggests that a company sale may be ‘caught’ by the targeted anti-avoidance rule (TAAR) designed to deter ‘phoenixism’ when a company is wound up.
‘TAAR’ very much!
The TAAR in question (ITTOIA 2005, s 396B) applies to distributions received on or after 6 April 2016 in winding up a UK resident close company. It goes without saying that getting money out of a company without paying income tax (and possibly National Insurance contributions) is no easy task. Distributions received from the liquidator in the course of winding-up are, however, automatically treated as capital distributions.
This might encourage the accumulation of profits in the company before winding-up and starting a similar business in a new company with the same shareholders – so-called ‘phoenixism’.
The effect of the TAAR is basically that if a former shareholder (or in some circumstances a person connected with them) carries on or is involved in some way with a similar activity within two years from receiving a capital distribution, this is re-categorised as an income distribution.
Is it ‘caught’?
The application of the TAAR rests on four conditions (A-D) being met. Briefly, Condition C lists the behaviours at which the TAAR is aimed (e.g. carrying on a similar activity as a sole trader, company or partnership). However, the scope of the TAAR is limited by Condition D, which requires that ‘it is reasonable to suppose, having regard to all the circumstances’, that tax avoidance was the main purpose.
There is HMRC guidance (in the Company Taxation manual at CTM36340) but there is no clearance procedure, formal or informal, on the basis that the taxpayer should know whether tax avoidance was the main purpose and self-assess accordingly.
Enter Spotlight 47…
In Spotlight 47, HMRC argues that the TAAR can apply to a company sale in certain circumstances and reference is made to ‘schemes’ which aim to get around the TAAR by selling the shares to a third-party as an alternative to winding up. The third-party may then liquidate the company and use the cash in the company to fund the purchase price or they could extract the cash and leave the target company dormant so no winding-up is involved.
However, leading tax experts consider that ITTOIA 2005, s 396B is clearly aimed specifically at distributions received in winding up and cannot, therefore, apply to the proceeds of the sale of a company whatever the purchaser does subsequently.
Raising the stakes
HMRC ‘up the ante’ in Spotlight 47, suggesting that if the TAAR does not apply they may seek to apply the general anti-abuse rule (GAAR) and remind the reader that if the GAAR applies the user of the scheme is liable to a penalty of 60% of the tax avoided or even 100% in some circumstances.
There are also severe penalties under the GAAR on the ‘enabler’ of an arrangement deemed to be abusive; it seems unclear who might be offering such arrangements or whether the guidance is intended to warn off potential users or enablers by scaremongering that either the TAAR or the GAAR could apply, both of which are highly contentious.
The putative schemes might be used in relation to ‘money box’ companies, which have ceased business or sold their business and assets and now hold cash representing accumulated profits. Obviously, anyone using or enabling a scheme to get around the TAAR in such circumstances must know what they are doing and will need to be advised of the dangers, such as they may be, of doing so.
Practical tip:
However, where a company which has accumulated cash reserves is sold under a normal commercial deal to a third party (assuming the buyer is willing to, in effect, pay cash for cash) the circumstances may be clearly distinguished from the arrangements/schemes at which Spotlight 47 is aimed. It seems inconceivable, therefore, that either the TAAR or the GAAR could apply but, as noted, the responsibility is on the taxpayer to correctly self-assess.
