Recent Tax Cases reinforce the message : Get Advice : Get It Right : Document It.
The case of D. George shows the common promise of “you will be looked after on a third party sale” can fall foul of horrid tax consequences if there is no advance advice and documentation.
On a separate, and totally different technical argument, a taxpayer and spouse undertook (for presentational purposes) a development project through an associated company, which they owned jointly. Circumstances, with a crash in the development value, made their ideas change. In the end, the company was wound up without repaying the director’s loan which funded the development work. As a result, the owners were not deemed to have incurred the crucial enhancement expenditure on the development, and so obtained no tax relief on £250,000 paid out.
Painful lessons on both counts.
1. Get Advice
2. Get It Right
3. Document It.
If in doubt, repeat step one!
As you may be aware, new rules are being introduced with effect from April 2016 as part of the Finance Act 2016. These relate to distributions in a winding-up/liquidation and are designed to target certain company distributions in respect of share capital in a winding-up. Where a distribution from a winding-up is caught, it is chargeable to income tax rather than capital gains tax.
The rules apply where the following conditions are met:
- The company being wound up was a close company (or was within the two years prior to winding-up)
- The individual held at least a 5% interest in the company (ordinary share capital and voting rights).
- The individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution
- It is reasonable to assume, having regard to all of the circumstances that there is a main purpose of obtaining a tax advantage.
Whether or not Conditions C or D are triggered could be a cause for some contention, and so HMRC note that they have received a number of clearance applications relating to these new rules.
In the absence of a statutory clearance procedure under the new legislation, HMRC have clarified that it is not their general practice to offer clearances on recently introduced legislation with a purpose test. They have instead sent out a standard reply providing some examples of how they think the rules will apply.
Clearly this is a developing area and HMRC’s reaction is somewhat disappointing as taxpayers often require certainty before carrying out commercial transactions which could be caught. HMRC have stated that further guidance will be published, however in the meantime we advise that care be taken, and seeking professional advice, as always, may save time and costs in the long run.
We would be delighted to assist if you think you may be affected by these rules and have any queries.
Budget 2013 announced various anti avoidance measures aimed at the loan to participators/overdrawn directors accounts s.455 tax charge .
Repayment Provisions Amended To Deny “Bed & Breakfasting”
Certain owner managed companies have previously been extracting funds from the company through overdrawn directors loan accounts, which are then repaid by crediting the loan account just before the date when tax would become due under s.455. They would then subsequently recreate a similar debt to the company. Such tactics are now being targeted by HMRC as previously there were no specific rules to prevent it.
The repayment provisions are to be amended so as to deny relief for the loan to participators s.455 tax charge where repayments and re-drawings are made within a short period of time of each other, or there are arrangements (or an intention) to make further chargeable payments at the time repayment is made (and there are subsequent re-drawings).
The effect of this being that the loan to participators s.455 tax charge can no longer be avoided by repaying the loan within 9 months of the accounting period end if a loan is taken out again soon after or there is an intention to do so. Therefore such ‘bed and breakfasting’ is no longer a possibility.
Loans via Relevant Partnerships & LLPs
Legislation will be introduced in Finance Bill 2013 to apply the loan to participators s.455 tax charge to any loans from close companies to participators made via partnerships (including LLPs) in which the close company and at least one partner/member is a participator (or associate of).
Extractions of Value
Where there is an extraction of value from a close company and the value is transferred to a participator, there will be a 25% tax charge on the close company on the amount of the payment to the participator.