Three important things have happened since we last blogged on the subject of “the TAAR” back in January. But first, a reminder of what it is.
What is the TAAR?
The TAAR is the relatively new tax rule which can apply to treat proceeds received by a taxpayer upon the liquidation of a company as “income” rather than “capital”, for taxation purposes.
The law prescribes that this will be the case where 4 conditions (A to D) apply, duly summarised by the following:
- Condition A: The individual has at least a 5% stake in the company which is liquidated.
- Condition B: The company which is liquidated is (or was) a “close” company [nb. 99% of our client companies are “close”].
- Condition C: Within two years of a distribution in a liquidation, the individual carries on a “trade or activity which is similar to” that of the company which was liquidated.
- Condition D: It is reasonable to assume that the main purpose (or one of the main purposes) of the liquidation is the avoidance, or reduction, of Income Tax.
3 important developments
- In the last two months we have seen a significant increase in interest in this area, indicating considerable and increasing interest in the possible merit of undertaking solvent liquidations (or Members’ Voluntary Liquidations as they are formally known).
- We have worked on potential TAAR-affected cases with Tax Counsel which have made it even clearer to us, in this new and untested legislative arena, that two of the four Conditions (C & D) for the TAAR to apply are sometimes far from obvious or simple to interpret; and
- We are wider awake now to the fact that the TAAR applies to individuals but does not apply to trustees, which is potentially helpful in more circumstances than we might have previously appreciated.
Conditions C & D
The TAAR is a challenging piece of legislation, not least because it frightens taxpayers and inhibits them from taking a course of action which might be perfectly appropriate and reasonable. This is no doubt part of the government’s intention, of course.
The two Conditions, referred to in point 2 above, which taxpayers might typically need help with before they risk making any “DIY” decisions about their exposure, or otherwise, to this rule, are:
- Condition C – the question as to whether they might be “undertaking a similar activity” within a period of two years after the receipt of liquidation proceeds; and
- Condition D – the question as to whether it is “reasonable to assume” that the liquidation has been undertaken with tax avoidance as a main purpose.
With potentially very large sums of tax at stake (between, for example, extraction of liquidation proceeds at 10% Capital Gains Tax as compared to 38.1% Income Tax), a relatively modest investment in leading professional guidance for greater confidence in decision-making and protection from penalties, can be highly advantageous.
TAAR review service
In order to meet demand, we have teamed up with leading Tax Counsel to provide a packaged TAAR review service. The purpose of this service is to assist taxpayers in obtaining best advice with which:
- to make appropriate decisions;
- to demonstrate “reasonableness” of approach (which is indicated as being relevant within HMRC’s own manuals); and
- to protect themselves against the risk of penalties in the event that HMRC were to successfully contest a tax treatment.
As part of the review service, we will investigate all the relevant (and potentially relevant) background facts and circumstances associated with any proposed solvent liquidation, filter those down into the key aspects for which the law might apply, and generate a written Opinion from Counsel following a conference (conducted via Zoom) on the issues, involving taxpayer, Counsel and ourselves. The taxpayer involved can then rely on the output.