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ATT Warns UK Taxpayers Of New 'Pheonixing' Tax Rules

by Jason Gorringe, Tax-News.com, London

05 January 2018


Taxpayers completing self-assessment tax returns need to consider the impact of new rules if they have received a distribution on winding up their company on or after April 6, 2016, and continue to be involved in similar activities, the Association of Taxation Technicians (ATT) has said.

It pointed out that new legislation prevents individuals lowering their tax liability by converting what might otherwise be received as a dividend into a capital payment by winding up their company.

Currently, when a company pays a dividend to its shareholders, the distribution is normally subject to income tax at the rates applicable to dividend income (for 2016/17 these were 7.5 percent, 32.5 percent, and 38.1 percent, depending on the individual's level of income). By contrast, if a shareholder receives a distribution when their company is wound up, this is normally subject to capital gains tax, which is generally payable at a lower rate (as low as 10 percent if certain reliefs apply.)

The new rules apply, broadly, where an individual who winds up their company continues to carry on, or be involved with, the same or similar trade at some point in the next two years and the main purpose, or one of the main purposes, is to reduce their income tax bill, the ATT said. Where this is the case, any distribution on winding up will be subject to income tax, and not the lower rates of capital gains tax, which normally otherwise apply.

These new rules were originally proposed to tackle tax advantages arising from phoenixing, the practice of liquidating a company and then setting up a new company to carry on much the same activities. However, the scope of the legislation goes beyond this and has the potential to apply in a much wider range of situations, says the ATT.

Tax returns for the tax year ended April 5, 2017, are the first to which the new rules can apply. The ATT is urging potentially affected taxpayers and their agents to consider providing additional detail in the white space of the self-assessment return as this may provide some protection from penalties for errors in returns. This extra information could include, for example, information on the background to the winding up and why they believe the rules do not apply, the ATT suggested.

Yvette Nunn, Co-chair of ATT's Technical Steering Group, said: "As these new rules are self-assessed, taxpayers have to decide whether they apply. They must therefore be considered in any situation where a taxpayer has wound up their company since April 6, 2016, and continues to be involved in similar activities. Deciding whether the rules apply is complicated by the subjective nature of the conditions, the lack of any clearance facility, and the limited practical examples in HMRC's guidance. It is unclear if a taxpayer genuinely believes that they do not apply, but HMRC concludes they do, whether penalties will be imposed."

"We have written to HMRC asking for further guidance on the application of the rules, including how HMRC will apply penalties if they consider an error has been made in a tax return. If there is any doubt as to whether these rules may apply, taxpayers and their agents should consider providing additional detail in the white space of the self-assessment return as this may provide some protection from penalties."

TAGS: individuals | tax | United Kingdom | legislation | penalties | trade | Tax

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