Does your client expect to pay Income Tax at a rate of up to 38% on the net funds distributed as a result of winding-up his or her own company? Almost certainly not but that is the intended result of the application of new “Phoenixing” rules introduced by the 2016 Finance Act.
Broadly speaking, where a shareholder receives a distribution from one company in liquidation and, within two years of that date, sets up another business to carry out the same or similar activities, the distribution will be taxed as income, not as a capital gain, if the arrangements had a tax avoidance motive.
Unfortunately, there’s no built-in clearance mechanism under these new rules, so ultimately the taxpayer concerned will have to self assess the tax treatment of the distribution. If no other action is taken, this will create major headaches for Agents, who will need to ascertain and document motive as part of the personal tax compliance work.
Given that the Transactions in Securities (TiS) rules have been amended to put beyond doubt that a liquidation is within their scope, we recommend that a robust TiS Clearance Application is submitted well before any distributions are made by the Liquidator. Provided that TiS clearance is forthcoming, if HMRC attempts to invoke the Phoenixing rules at a later date, a vigorous defence can be made to the charge that the arrangements were tax motivated.
As mentioned elsewhere, the preparation of robust Tax Clearance Applications is one of our specialisms, so please do get in touch with us if you’re concerned about the impact of these new rules on your client’s commercial plans.