From 6 April 2016 the Government is making major changes to the way in which certain distributions from companies in members’ voluntary liquidation (MVL) will be taxed. This could result in significantly increasing the tax payable by shareholders of companies entering into MVLs.
What are the changes?
Currently, post-liquidation distributions are classed as capital and are taxed as capital gains. This treatment generally attracts significantly lower levels of tax than if shareholders pay themselves dividends in order to extract company value. This is especially the case if Entrepreneurs’ relief is available, as this reduces the rate of tax still further to 10%.
The Government is clamping down on what it sees as unfair tax practices in which people arrange their tax affairs purely with the aim of paying lower levels of tax. Consequently, from 6 April a Targeted Anti-Avoidance Rule will be introduced that will mean that certain distributions from MVLs will be taxed as dividend income.
The introduction of the Targeted Anti-Avoidance Rule coincides with new dividend reforms that could see many individuals paying even higher effective rates of tax on their dividend income at up to 38.1%. Hence the rule will be introduced at a time when extracting company value as capital will become even more attractive to shareholders and has been brought in specifically to deter this.
Will I be affected?
The rule has been designed to target MVLs where shareholders extract funds via a capital distribution and then set up a replacement company which carries on the same, or substantially the same, activities.
Distributions will be treated as dividend income if the following conditions apply:
- an individual who is a shareholder in a close company receives from a company a distribution in a winding-up;
- within a period of 2 years after the winding-up the shareholder continues to be involved in a similar trade or activity; and
- the arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.
What can I do?
If you are intending to liquidate your company, there is a brief window of opportunity to place it into liquidation and make distributions before 6 April 2016. These distributions will fall under the old rules and be taxed at capital gains rates. It is of paramount importance that if the Targeted Anti-Avoidance Rule is likely to affect your MVL, you seek professional advice well before the 6 April 2016. Tax Advisory Partnership are experts in corporate tax matters and are more than happy to assist with any queries you may have.
Helen trained and qualified as a member of the ICAEW with PwC where she gained over 10 years’ experience of working in their tax team prior to joining TAP. Helen has advised many UK and international clients, and supported management teams, owners and shareholders in respect of all aspects of their tax affairs.
Telephone: 0113 426 9311
Rachael moved to TAP from PwC, where she specialised in R&D tax incentives, working with businesses to identify qualifying activities and successfully submit claims. Rachael now joins the Leeds Corporate Team where she will be providing support on a broad spectrum of corporate tax advisory and compliance work.
Telephone: 0113 426 9312