Capital or Income? Its up to you to decide!

As many readers will be aware, on 6 April 2016 the anti-avoidance Transactions In Securities (TIS) rules were enacted as part of the Finance Act 2016 specifically to target phoenix companies.

Under the new TIS rules, certain distributions made to shareholders are treated as income rather than capital. The rules apply where the main purpose or one of the main purposes of a transaction is to enable any person (not just a person who is party to the transaction) to obtain a tax advantage and there is a repayment of share capital, repayment of share premium or a distribution in a winding up.

In relation to winding up, the Targeted Anti-Avoidance Rules (TAAR) are applicable where:

  • the company is a close company;
  • the individual receiving the distribution holds more than 5% of the share capital;
  • within two years of the distribution, the individual is involved in a similar trade or activity.

HMRC does not provide a formal clearance procedure and accordingly, transactions will have to be self-assessed by the taxpayer and their advisors. In addition, the legislation is sufficiently vague so as to create significant uncertainty; the definition of “involved” and “similar” is entirely unclear.

At White Maund and within the insolvency profession as a whole, we saw a marked increase in the number of solvent liquidations or Members’ Voluntary Liquidations (MVLs) just prior to the enactment of the new rules, however, contrary to our expectations we have continued to receive a significant number of MVL instructions.

In most MVLs we distribute the majority of the company’s assets either in cash or in specie within a short period following our appointment (the timing usually depends on how quickly the company’s former bank transfers cash to the liquidation account). Shareholders should seek advice from their accountants or tax advisors and be mindful that the two-year period commences from the date of the distribution and ensure that they are not involved in any activities that could lead to them falling foul of the new rules and incurring an unexpected tax liability.