Tax rule casts doubt over 18 winding-up transactions

A question mark over 18 transactions that limited companies might undertake when winding-up has been raised, because they could be caught by a new anti-avoidance rule.

The Chartered Institute of Taxation has submitted the transaction types to HMRC, which has been asked to clarify whether the 18 would breach the Targeted Anti-Avoidance Rule.

Far from being complicated examples, the transactions include the straightforward activity of a company being liquidated which has been dormant but has funds in its bank account.

Having to ask HMRC whether this ubiquitous business scenario is caught by TAAR and its provisions is proof that the rule is too “widely drawn,” the CIOT believes.

Introduced for certain distributions of share capital made on winding-up, TARR is aimed at a small number of taxpayers who have been exploiting the current rules to cut the tax they pay.

But it potentially encompasses a “very wide a range of legitimate commercial situations where tax avoidance is not likely to be the motivating factor,” the institute said.

Moreover, TAAR does not have a formal advance clearance procedure, whereas various other parts of UK tax legislation applicable to significant transactions do.

As a result, taxpayers will have to self-assess whether TAAR applies, whereas a clearance procedure would let taxpayers obtain a ruling from HMRC in advance of a transaction.

“This would greatly reduce uncertainty,” the CIOT said. “Instead, business can only use the wording of the legislation and HMRC’s guidance to decide for themselves whether the TAAR applies or not.”

To help taxpayers, the Revenue should publish “as soon as possible, even if in draft” clear guidance on how it plans to interpret the legislation (found at Finance Bill 2016 clause 35).

“The business community would prefer a more narrow use of the TAAR so that legitimate commercial decisions and transactions are not delayed or obstructed,” reflected Tina Riches, a chair at the CIOT.

She added: “We have…sent HMRC 18 examples of transactions provided by our members that we think are suitable for guidance and on which HMRC’s view is needed.”