21 May 2019
In February 2019 HMRC issued Spotlight 47, aimed at dealing with perceived circumventions of the Targeted Anti-Avoidance Rule (TAAR) introduced in 2016 to tackle tax avoidance using phoenixism. The ICAEW and CIOT recently met HMRC to get a better understanding of the Spotlight.
Three or more years ago, HMRC had observed that companies were being liquidated, with the owners being taxed under Capital Gains Tax (CGT) on any gains arising, often paying tax at only 10%, thanks to Entrepreneurs’ Relief (ER). These owners were then starting up new companies operating in exactly same businesses as the liquidated companies. This practice was referred to as phoenixism. HMRC perceived that money was being extracted from these companies by this method, whereas it would otherwise have been paid out as dividends, attracting income tax at rates of up to 38.1%.
The TAAR was introduced to stop this and dealt with the owners of liquidated companies by applying an income tax charge to any capital gains arising if those owners undertook trading in similar businesses to their liquidated companies within two years of the liquidation. The TAAR was very broadly drafted and there has been a good deal of uncertainty over the degree of similarity between businesses required to trigger these rules. Usually, if there is uncertainty of this sort, a pre-transaction clearance procedure is in place, so that taxpayers can get an understanding of HMRC’s view on a transaction. No such procedure is available for the TAAR.
The tax advisory community is nothing if not ingenious and HMRC has noticed a drop in company liquidations in recent years. It seems that company owners who may have been seen as being tax avoiders previously and some others, who just wanted certainty over their future activities after liquidating their companies, had found a way around the TAAR. This is achievable by, say, selling a company’s business to a third-party and leaving the company intact, or by realising the assets of a business – think of a special purpose company for a particular property development, once all of the houses are sold, the company only has cash on its balance sheet. This cash–rich company is then sold to a third party, who pays the owner, who realises a capital gain and pays CGT. The new owner either liquidates the company and claims the cash or, if it’s under corporate ownership, pays up the cash as a dividend and leaves the old company dormant. The former owner can then go about his or her life, undertaking the same business or not, without the concern of an unexpected income tax assessment.
Or at least that was the case until Spotlight 47 was published, highlighting the practices outlined above and giving HMRC’s opinion that this sort of behaviour could still fall within the TAAR and, even if it didn’t, it could fall under the General Anti-Abuse Rules (GAAR). In other words, if they don’t get you one way, they will get you another!
The ICAEW and CIOT recognised that this gave many businesses a level of uncertainty on a par with the TAAR, but over a wider set of circumstances, so they met HMRC to try find out where HMRC’s perceived abuse lines might lay. Unfortunately, the meeting was not able to give much certainty to taxpayers, although HMRC did recognise the uncertainty its interpretations created. HMRC’s view remains that only straightforward company sales and liquidations, undertaken without any tax considerations, are not caught by either the TAAR or the GAAR.
If you are thinking of selling your company or its business, you need to consider carefully how any proceeds are dealt with and how they may be taxed. If you want advice in this area, please do not hesitate to contact me or your local UHY specialist to discuss your options.