Contractors warned over new winding-up rules

PSC contractors completing their tax return may be hit by new rules if they received a distribution on winding up on or after April 6th 2016 -- and remain involved in similar trade.

Issuing this alert, the ATT said the rules stop people lowering their tax liability by converting what might otherwise be received as a dividend into a capital payment by winding up.

The rules apply where the winding-up person continues to be involved with a similar trade at some point in the next two years, and the main aim is to lower their income tax bill.

“[In this] case,” said the Association of Taxation Technicians (ATT), “any distribution on winding up will be subject to income tax, and not the lower rates of CGT which normally apply.”

The new rules were created to tackle tax advantages arising from ‘phoenixing’ – the practice of liquidating a company and then incorporating afresh to carry on much the same activities.

But the association says the scope of the legislation is greater, meaning the rules can apply in a much wider range of scenarios. Worse still, it’s up to taxpayers to decide applicability.

“Deciding whether the rules apply is complicated by the subjective nature of the conditions, the lack of any clearance facility and the limited practical examples in HMRC’s guidance,” said ATT’s Yvette Nunn.

“It is unclear whether if a taxpayer genuinely believes that they do not apply, but HMRC concludes they do, penalties will be imposed.

“We have written to HMRC asking for further guidance on the application of the rules, including how HMRC will apply penalties if they consider an error has been made in a tax return.”

If taxpayers or their accountants have any doubt as to whether the rules apply, the ATT says the best advice is consider inputting details in the white space of the self-assessment return.

“This may provide some protection from penalties,” Nunn advised. “This extra information could include, for example, information on the background to the winding up and why they believe the rules do not apply.”

The rules have been on tax advisers’ radars for quite some time, as have the conditions which have to be met for them to apply, but imminent tax returns (for the year ended April 5th 2017) are the first opportunity for them to be enforced by HMRC.