Winding up your business? Watch out for the new rules.

BLOG19th Feb 2016

The way in which you’re taxed when a company is sold or wound up is about to change. In this blog article we outline the implications.

April 2016 may herald a shock for business owners, as we’re going to see an increase in potential tax liabilities. Normally, directors will pay themselves a salary, benefit from dividends and then take a capital lump sum at such point that the business is wound up or sold.

Currently, on the sale of shares in a trading company – or where a trading company is wound up – Capital Gains Tax (CGT) would usually be payable on any monies paid out to the shareholders, at rates of 18% or 28%. There has always been the possibility, however, of claiming Entrepreneurs Relief if the company activity could be regarded as a trade and other relevant conditions are met. A successful claim can result in your liability being reduced to 10%.

A consultation was launched at the end of last year about a number of changes which could end up having a big impact. In the event of a company being involved in a ‘Winding-Up’ (which appears to include both a Striking Off or Members Voluntary Liquidation (MVL)), the Revenue is recommending that distributions will be charged to Income Tax rather than CGT when certain conditions are met. Where total income falls into the higher-rate tax bands, those rates could be 32.5% and/or 38.1%.

HMRC indicate that these proposals are being aimed at situations such as:

  • Sales of Shares to Third Parties

Where a shareholder is aware that a sale of the company’s shares is imminent they may arrange to retain profits within the company for a period before sale (eg they may reduce their normal levels of salary and dividends with the intention of receiving a higher amount of sale proceeds).

  • ‘Moneyboxing’

Where a company has retained profits in excess of its commercial requirements, often being with a view to the shareholders subsequently receiving the retained profits as a capital amount, when the company is eventually wound up/liquidated.

  • ‘Phoenixism’

Where one company has built up retained value from its trading activities but is then liquidated, with a capital sum being received by the shareholders and a new company is set up to carry those similar – or substantially the same – activities.  The shareholders benefit from the receipt of a capital sum and are also able to carry on their existing trade.

  • ‘Special Purpose Companies’

Where the company in question was just one of a number of companies, between which the activities of a single business were divided, with each of them undertaking a specific part or project.  As each specific part/project is completed the relevant company could then be wound up and the profits realised as capital rather than income.
In particular, HMRC intend to introduce a Targeted Anti-Avoidance Rule which would apply to certain distributions from a Winding-up and result in them being taxed as income. The rule will apply where:

  • within two years of a company being wound up, the individual (or certain ‘associates’ of theirs) who received the distribution, continue to be involved in a similar trade or activity
  • one of the main purposes of the arrangements was to obtain a tax advantage.

As the consultation period recently came to an end in early February 2016, it will be important to keep in close contact with your professional advisers to monitor developments and find out how the changes may affect you and your business.