In April 2016, the Targeted Anti-Avoidance Rule (TAAR) was introduced. This rule was established in order to prevent individuals from winding up companies in order to lower their tax liabilities.
In this blog, we will provide a brief overview of TAAR and discuss some of the main considerations. Please note that this blog offers general guidance only and does not constitute professional advice. If you are considering liquidating your company and are concerned about TAAR, we recommend that you instruct an accountant or qualified tax adviser without delay.
What is TAAR?
Most people are familiar with the term ‘phoenixing’, which refers to the practice of winding up a company – largely with the aim of escaping financial liabilities – and then setting up a new company which continues with the same activities (but under a different name). The TAAR is one of the mechanisms introduced by HMRC to combat such a practice, and to clamp down on individuals who seek to avoid tax liabilities by converting dividends into capital payments by liquidating their companies.
When does TAAR apply?
Though – as mentioned – TAAR was initially set up to tackle phoenix companies, the legislation provides scope for TAAR to apply in a much wider range of scenarios. Under TAAR, distributions that are made to individuals after 6th April 2016 will be subject to income tax if the following conditions are met:
- If the individual receiving the payment (distribution) had a financial interest of at least 5 in the company immediately before it was liquidated (known as ‘Condition A’).
- If the company was a close company at any point during the two years preceding the start of the winding-up process (known as ‘Condition B’).
- If the individual who received the payment continues to be involved with activities that are the same (or similar) as those carried out by the distributing company within two years of the distribution (known as ‘Condition C’).
- If it can reasonably be assumed that the motivating factor – or one of the motivating factors – behind the company being liquidated is to avoid or reduce income tax liabilities (known as ‘Condition D’).
Of the conditions cited above, it’s clear that Conditions A and B are easier to assess. Indeed, such conditions would apply to many family businesses or owner-managed companies. Conditions C and D are a little more complex, however, and certain tests should be applied in order to decide whether the company in question meets these conditions.
For example, if the relevant individual is involved in another business following the winding up of the distributing company, whether the trade of the second business is ‘similar’ or the ‘same’ needs to be considered very carefully – as does the extent of that person’s involvement. The legislation indicates that Condition C could be met in a variety of scenarios, and goes beyond the basic definition of ‘phoenixing’: for example, if a similar activity was carried out and the individual in question was not involved personally – but through a connected party or even a separate company – TAAR is likely to apply.
Things become even murkier when considering Condition D, as the wording is very open to interpretation. However, there is some guidance on the subject – and the details are fairly broad in scope. The individual’s past behaviour can be brought to bear, as well as the size of the tax advantage and any special circumstances. As such, any decisions need to be made on a case-by-case basis and with careful consideration of all relevant factors.
At IBISS & Co, our expert accountants and chartered tax advisers are in regular contact with HMRC and are fully apprised of all the latest legislation. If you have received an enquiry notice regarding TAAR, or would like advice about winding up a company, please do not hesitate to contact us.