Tax (and the dreaded A word) Avoidance & Solvent Liquidations!

January 22, 2016 by
Filed under: insolvency, Liquidation, Taxes 

You may not have noticed, but tucked away in the small print of the Chancellor’s Autumn Statement was a provision (effective from 6 April 2016) designed to tighten up on the ability of shareholders to tax efficiently extract capital from a business by way of a solvent liquidation. Whilst it is arguable that HMRC always had the ability to argue that capital distributions were in fact income, the new provisions make HMRC’s position clearer. So, where HMRC forms the view that a company’s reserves are in excess of those required for use in the ordinary course of business, then any capital distribution out of liquidation may be challenged, on the grounds that the main purpose of the winding up was to obtain a tax advantage. Furthermore, where a company is part of a group structure, group reserves will also be taken into account.

Further, there will now be specific anti-avoidance legislation that tackles what HMRC calls “phoenixism”. Where a liquidation is followed by involvement in a similar trade or activity within two years, then the capital distributions will be treated as income.

There are other changes, but these are the most commonly encountered.

So, if you have clients who are considering a solvent liquidation they may be best advised to start the process (and make distributions under the present rules) as soon as possible, and certainly before the end of the tax year. If you would like to discuss this issue further, please do not hesitate to contact us.