TQOTW: Business Closure

My clients, a married couple, currently run a personal consulting business through a limited company. Owing to the Coronavirus pandemic, the demand for services from the business has reduced substantially. The company has a healthy bank balance representing accumulated reserves and so will not necessarily qualify for support under the Coronavirus Business Interruption Loan Scheme. My clients are therefore considering liquidating the company but may restart a new company at a later date should the business climate improve. They expect to pay capital gains tax on the cash received via the liquidation. Are there any other personal tax issues to consider?

The Coronavirus pandemic has resulted in various government support packages, for businesses, for employees and for the self-employed. However, apart from the measures announced, the existing tax rules continue to apply including the anti-avoidance rules which have the effect of treating capital distributions in a liquidation as income distributions chargeable to income tax.

Your clients appear to be in a position where they can currently vote themselves dividends out of company reserves and pay income tax accordingly. Therefore, when considering the anti-avoidance rules, HMRC will need to be convinced there is a genuine reason why the company needed to be liquidated only to restart again later. HMRC’s views on whether the anti-avoidance rules apply may be swayed by genuine difficulties created by Coronavirus but each case will be dependent on its own facts

As the company is a close company, the liquidation is a Transaction in Securities (TIS) within s684 ITA 2007. Therefore HMRC have the right to issue a Counteraction Notice under s698 ITA 2007 which will treat the liquidation distributions as income distributions. Therefore, best advice would be to apply for a statutory clearance under s701 ITA 2007. It is important that full disclosure of all relevant facts are made as any change of facts compared with those disclosed may result in the clearance being withdrawn.

The other anti-avoidance rule is the so-called “anti-phoenixing” rule in s396B ITTOIA 2005. Unfortunately, there is no clearance procedure available but HMRC’s guidance is at CTM36300. Broadly, if your clients restart their business within 2 years of receiving a liquidation distribution then HMRC are able to consider whether the main purpose, or one of the main purposes of the liquidation was to avoid or reduce a charge to income tax. Therefore, in the absence of a clearance procedure, HMRC’s guidance should be considered carefully.


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Tax Consultant
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David started his tax career with the Inland Revenue and then moved into practice with responsibility for the tax department of a mid-size practice. David has experience of dealing with, amongst other things, trusts and estates, HNW individuals, non-residents and both OMBs and large companies. He is qualified with the Association of Taxation Technician.

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