What tax is paid on winding up a company?

In 2016 a targeted anti-avoidance rule (TAAR) was introduced to prevent individuals from winding-up their close company, taking out the retained cash at capital gains tax rates and then continuing the same business in another vehicle.

In HMRC Spotlight 47 HMRC declare that schemes designed to step around this TAAR, which involve selling the company to a third party rather than winding it up, don’t work, so the TAAR would apply with the result that the withdrawn cash would be subject to tax at income tax rates.

HMRC’s view is misleading to say the least.

The TAAR only applies if a company is wound-up, it can not apply if the company is sold to a third party. If a business owner decides to sell their cash-rich company to a third party in order to release the funds, and within two years (the period defined in the TAAR), starts a similar trade or activity, the income tax charge imposed by the TAAR cannot apply. It is disingenuous for HMRC to imply that it could.

What’s more HMRC say that the general anti-abuse rule (GAAR) would apply in these circumstances if the TAAR doesn’t apply. This is also nonsense, as it was not the intention of Parliament for the TAAR to apply on the sale of a company to a third party.

Clearly if there is a non commercial arrangement with a third party undertaken with the primary aim of sidestepping the TAAR then it is to be expected that the transaction will come under scrutiny.  

HMRC is trying to frighten people away from using tax avoidance schemes, which is a good thing, but it needs to use this power in a responsible way. 

You can read Spotlight 47 here

Disguised Remuneration – Update

Loan Charge – Government Review

Groups who have been campaigning for the 2019 Loan Charge to be scrapped won a small victory last week. They secured an amendment to the Finance Bill which forces the government to review the loan charge legislation by 30 March 2019.

This does not remove or alter the loan charge, which comes into effect to on 5 April 2019, as the law was passed in 2017, with supplementary charges added in 2018. However, the requirement for a review, particularly of the apparently retrospective nature of the charge, has been welcomed by the professional bodies and contractor groups.

HMRC has estimated that around 50,000 people may have used loan schemes managed by offshore ‘umbrella’ companies. However, only around 25,500 individuals have come forward to agree a repayment schedule of the tax due.

The remaining taxpayers in that group will be subject to the loan charge from 5 April 2019 if they have not agreed a settlement with HMRC by that date. Those taxpayers do not have to pay all the tax due by 5 April 2019, but they must have an agreement in place to pay.

Where the taxpayer’s current annual income less than £50,000 and they are no longer using loan scheme or any tax avoidance arrangement, HMRC will offer a five-year instalment arrangement to pay the outstanding tax, on a ‘no questions asked’ basis. If the taxpayer needs longer than five years to pay, HMRC will consider the case on an individual basis.

Where HMRC accept an instalment arrangement, they will charge ‘forward interest’ – which is the normal interest rate plus 1%, with effect from 6 April 2019. The estimated forward interest, based on the progressively reducing balance after each instalment, will be included in the settlement amount.

It is imperative that the taxpayer makes the promised payments under the settlement in full and on time. If they default on the instalment arrangement made, the debt will be passed to HMRC’s Debt Management team, who are more rottweiler than pussycat – possibly not like this though!

HMRC originally set a deadline of 30 September 2018 for people to agree a settlement for loan charge liabilities, but they will still work with agents and taxpayers to come to an agreement even at this late stage.

Overview of the Loan Schemes and loan charge

Loan Charge FAQs

Disguised Remuneration – Avoidance

HMRC has updated the payment terms for settlement of disguised remuneration avoidance cases, which can be found on GOV.UK

Disguised remuneration tax avoidance schemes claim to avoid the need to pay Income Tax and National Insurance contributions. They normally involve a loan or other payment from a third-party which is unlikely to ever be repaid.

These schemes are used by employers and individuals. If they’re used by contractors, they’re often known as contractor loans.

If you’re in a disguised remuneration scheme, you should settle your tax affairs as soon as possible. If you don’t, the new loan charge announced at Budget 2016 will apply to all disguised remuneration loans outstanding on 5 April 2019.

Please contact us if you need help.