Ken Moody muses on recent advice given on the application of anti-avoidance rules to distributions in winding up and wonders, several years since its introduction, how often it is applied in practice.
Many readers will no doubt remember the ‘good old days’ when you could wind up a company, pay capital gains tax at only 10% on distributions from the liquidator (with the benefit of entrepreneurs’ relief) and then, if you wished and if practicable, you could start up a similar business in a new company – now known as ‘phoenixism’. As a (doubtful) bonus, until 2016, a winding up was not specifically a transaction in securities (TIS).
Stopping the ‘phoenix’…
Certainly, intended as a ‘spanner in the works’ of tax-motivated winding-up is ITTOIA 2005, s 396B (introduced by FA 2016), along with changes to the TIS rules – also designed to deter phoenixism, among other things.
Entrepreneurs’ relief is still with us, renamed of course as business asset disposal relief (BADR), though now it only applies to gains on disposals of ‘business assets’ of up to £1m over a lifetime (down from £10m at its height).
I do not feel unduly concerned about changes to the TIS rules because they were widely enough drawn to have applied to distributions in winding up before the 2016 amendments – but had not been.
Turning to ITTOIA 2005, s 396B, four conditions (A-D) must be met, of which conditions A and B can usually be taken ‘as read’ in cases of concern. Condition C imposes a two-year deadline on any involvement in a similar business after receiving a distribution in the winding-up of a private (close) company (X).
…or does it?
Condition D is the real quandary. It asks whether it is ‘reasonable to assume, having regard to all the circumstances’, that the ‘main purpose or one of the main purposes’ of the winding up (or of any arrangements of which the winding up is part) is the avoidance of income tax. To my mind, condition D sets a fairly high bar for HMRC to climb over, and that is where the ‘crunch’ comes. In most cases I have come across in practice, the shareholder in Company X (as it were) holds shares in or is otherwise involved in a similar business in circumstances which have come about quite fortuitously or organically – often simply as a matter of history.
The scary aspect of ITTOIA 2005, s 396B is that it aims to re-categorise distributions received in winding up Company X, in effect, as dividends and so the concerns are real in any situation where it might apply. On the other hand, it should not be regarded as a ‘bogeyman’. The intention may well have been to deter at least the most blatant, possibly serial examples of phoenixism. In that, it may have been successful, albeit at the expense of raising doubts in situations not involving tax avoidance (as always is the case).
I have no idea how HMRC polices ITTOIA 2005, s 396B. I doubt that taxpayer disclosures play a significant part. There are no specific disclosure requirements and I doubt that anyone would self-assess on the basis that the legislation applies (though their advisers should have warned them that it might).
Practical tip
There is no statutory clearance procedure in relation to ITTOIA 2005, s 396B and HMRC does not give clearances on questions of fact so the non-statutory clearance procedure is not appropriate either. Thus, at the end of the day, the taxpayer and their advisers must simply take a realistic and commonsense approach – always allowing for what HMRC may consider ‘reasonable to suppose’ might differ from the streetwise view. I would not go so far as to say that ITTOIA 2005, s 396B is mostly ‘sabre-rattling’ but the people to whom it ought to apply surely must know who they are, and act accordingly!
