HMRC issued a consultation document on 9 December 2015 with regard to the taxation of company distributions and new legislation is due to come into force on the 6 April 2016. This legislation is likely to have a significant impact on the taxation of distributions in a Members’ Voluntary Liquidation (“MVL”).
From April 2016, the way in which dividends are taxed will be fundamentally reformed for individual recipients. The Government believe that the changes will increase the incentive to plan for returns from a company to be taxed as capital rather than as income, attracting tax at lower CGT rates, rather than the new dividend tax rates.
The Government are aiming to introduce a new Targeted Anti-Avoidance Rule, which would prevent some distributions in a winding up being taxed as capital, where certain conditions are met and there is an intention to gain a tax advantage.
The Government are particularly concerned about the following kind of tax planning:
- “Money boxing“, where the shareholders of a company retain profits in excess of the company’s commercial needs and so receive these profits as capital when the company is eventually liquidated.
- “Phoenixism”, where a company enters into an MVL and a new company is set up to replace the old and carry on the same, or substantially the same, activities. The shareholder here receives all of the value of the company in a capital form while the trade continues in a new company exactly as before.
It is proposed that the new Targeted Rule will treat any distributions on a winding up of the company as income distributions where:
- an individual who is a shareholder in a close company receives a distribution in resect of shares in a winding-up from the company;
- within a period of two years after the distribution, the shareholder continues to be involved in a similar trade or activity; and
- the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage.
The above proposed changes, coupled with the new dividend tax rates, will decrease the return to shareholders in certain MVL situations after 6 April 2016. We have a dedicated team at LCBSG that undertake MVLs and would be delighted to assist any clients considering an MVL.
LCBSG’s bespoke online platform, My-MVL, is a specialised service which allows you to manage MVLs easily and efficiently.
Find out more by clicking here.
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