Our clients, a married couple, currently run a personal consulting business through a limited company. Owing to the Coronavirus pandemic, the demand for services from the business has reduced substantially.
The company has a healthy bank balance representing accumulated reserves and so will not necessarily qualify for support under the Coronavirus Business Interruption Loan Scheme. Our clients are therefore considering liquidating the company but may restart a new company at a later date should the business climate improve. They expect to pay capital gains tax on the cash received via the liquidation. Are there any other personal tax issues to consider?
The Coronavirus pandemic has resulted in various government support packages, for businesses, for employees and for the self-employed. However, apart from the measures announced, the existing tax rules continue to apply including the anti-avoidance rules which have the effect of treating capital distributions in a liquidation as income distributions chargeable to income tax.
Our clients appear to be in a position where they can currently vote themselves dividends out of company reserves and pay income tax accordingly. Therefore, when considering the anti-avoidance rules, HMRC will need to be convinced there is a genuine reason why the company needed to be liquidated only to restart again later. HMRC’s views on whether the anti-avoidance rules apply may be swayed by genuine difficulties created by Coronavirus, but each case will be dependent on its own facts
As the company is a “close” company, the liquidation is classed as a Transaction in Securities. Therefore, HMRC have the right to issue a Counteraction Notice which will treat the liquidation distributions as income and not capital. Therefore, best advice would be to apply for a statutory clearance under s701 ITA 2007. It is important that full disclosure of all relevant facts is made as any change of facts compared with those disclosed may result in the clearance being withdrawn.
The other anti-avoidance rule is the so-called “anti-phoenixing” rule. Unfortunately, there is no clearance procedure available but there is some HMRC’s guidance. Broadly, if our clients restart their business within 2 years of receiving a liquidation distribution then HMRC are able to consider whether the main purpose, or one of the main purposes of the liquidation was to avoid or reduce a charge to income tax. Therefore, in the absence of a clearance procedure, HMRC’s guidance should be considered carefully.[1]
[1] Reproduced from Croner Taxwise