Taking money out of a company must be done correctly to avoid falling afoul of the law, even if mistakes are made accidentally. Whether you intend to withdraw some money from an operational company, or wind it up and realise the retained profits, you need to know which laws apply and how they affect you and your company.
One of these regulations is TAAR, or the Targeted Anti Avoidance Rule. It is a relatively recent addition to U.K. law, being implemented as part of the Finance Act 2016, and aimed to crack down on “gray” tax savings that could be gained during phoenixing. While this was the initial purpose of TAAR, it is possible that the legislation can be applied to other scenarios. As such, it is vital that you be aware of TAAR if you intend to place your company into administration or liquidation to avoid any legal repercussions.
What is TAAR?
As we mentioned, TAAR was implemented as part of the Finance Act 2016 as a means to close tax loopholes present in certain methods of taking money out of a company, such as phoenixing during a company administration procedure. It does this by preventing an individual from withdrawing money from their company in the form of a capital payment, when it should be a dividend. While dividends are subject to income tax rates, capital payments are not. Capital payments are often made as a result of winding up a company, and such payments are subject to Capital Gains tax, rather than income tax. Capital Gains tax rates are considerably lower than income tax rates, and so the company that is winding up will end up paying much less in tax overall.
In essence, it aims to ensure that companies pay the appropriate amount of corporate tax that they owe based on their income, whether they are winding up or continuing to trade as normal. This rule is within the remit of HMRC, and so they will handle enforcement and the doling out of penalties as applicable.
What qualifies as a company attempting tax avoidance under TAAR?
TAAR concerns itself with an individual receiving a distribution from a company. Not all distributions are an issue, so the legislation will only apply to cases that meet certain criteria. These criteria are as follows:
- An individual receiving a distribution must have at least 5% interest in the company in question.
- The company was a close company at any point during the two years prior to the winding up process.
- The individual receiving a distribution from the company being wound up creates a new company within the same industry as the company in question. This rule applies for two years starting from the closing of the winding up of the company in question.
- One of the main reasons to place the company into a winding up procedure is to avoid paying the required amount of income tax.
If all of these four criteria are met, TAAR can be applied to your case. HMRC will then open an investigation into your company and your conduct as a director, and will apply penalties, should any be appropriate. However, TAAR cannot be applied if only three or fewer of these criteria apply.
How does TAAR impact the Members’ Voluntary Liquidation process?
Although TAAR primarily applies to administration, as this is the prime procedure that enables phoenixing, the legislation can also potentially be applied to the Members’ Voluntary Liquidation (MVL) procedure. This is because the MVL procedure has excellent tax benefits, mainly due to the fact that distributions are made in the form of capital payments, subjecting them to Capital Gains tax instead of income tax. As such, this could put a company winding up through this procedure on the radar of HMRC.
This being said, HMRC needs more than mere tax efficiency to go after a company under TAAR regulations. The company and its directors must meet the aforementioned four criteria before HMRC can pursue any legal action. This means that the MVL procedure is still a perfectly viable method of winding up a company, provided there are no attempts to start a new company that is similar to the old one within a two-year timeframe. This could be perceived as phoenixing, which is an attempt to avoid paying income tax by closing an old company and immediately starting a new one. If this happens, HMRC is likely to investigate, and legal penalties could apply.
What can business owners do to avoid falling afoul of TAAR?
Avoiding TAAR is a fairly simple task for upstanding directors. Although the regulation can be applied to a wide variety of cases, it is primarily focused on cracking down on phoenixing. While it is possible to accidentally phoenix, it is generally an active decision. To ensure you don’t accidentally phoenix, it is advisable that you obtain professional help when winding up a company or starting a new one.
TAAR doesn’t just apply to closing and opening companies, however. While this is arguably the main focus, TAAR can apply to individuals closing a company and getting involved with another, even if they don’t actively participate in the new company’s creation. To avoid this happening to you, it is important to carefully consider what company you involve yourself with after you have closed your company. TAAR can apply if the new company you are involved with is too similar, or even the same, as your old company. This is considered the third of the four aforementioned criteria, and, while it is a step beyond phoenixing, it will attract the attention of HMRC.
Clarke Bell can help
If you are considering winding up your company, don’t navigate the legal labyrinth alone; let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best paths forward, and our team of experts can ensure the best outcome for your business is achieved. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.