ICAS Response: Company distributions consultation
ICAS has called for caution in implementing proposed changes to the taxation of company distributions.
ICAS has expressed concern about the proposed changes to company distributions set out in draft Finance Act 2016 clauses.
Responding to a HMRC consultation which proposes capital distributions be taxed as income in certain circumstances to tackle perceived tax avoidance, the ICAS tax committee and the ICAS insolvency committee have highlighted the additional complexity which the proposed anti-avoidance measures would bring and the unintended adverse consequences which could arise. In particular we are concerned about the impact on non-tax motivated members' voluntary liquidations.
Read the ICAS Response
Susan Cattell, Head of Tax (England & Wales) said: "We believe the fundamental problem arises from the differential rates of income tax and CGT, particularly where entrepreneurs' relief is available. Adding increasingly complex anti-avoidance legislation will increase uncertainty and costs for legitimate business reconstructions and company dissolutions but may not be effective in tackling avoidance by those determined to exploit the rules."
HMRC highlights 'phoenixism' and 'moneyboxing' being used to avoid tax, which the new provisions aim to tackle. For many companies however the cost and inconvenience of winding up the old company and setting up a new company (with all the administrative requirements this entails), together with the potential adverse effects on relationships with customers and suppliers, would outweigh any tax advantage that could be gained.
HMRC also highlight the use of single purpose vehicles (SPV) as a method to avoid paying income tax, however the approach proposed significantly increases the risk for legitimate SPVs used with the intention of mitigating commercial risk, particularly in the property development sector.
While the 'phoenixism' and 'moneyboxing' highlighted by HMRC might be relevant to personal service companies in certain sectors the ICAS consultation response suggests that the proposed Targeted Anti-avoidance rule(TAAR) is not the best way of dealing with them and that a more targeted approach to tackling abuses should be adopted.
The proposed measures are likely to cause difficulties for legitimate and non-tax motivated members' voluntary liquidations (MVLs). The uncertainty over whether HMRC will consider the MVL as having a main purpose, or one of its main purposes to avoid or reduce income tax, is likely to mean that shareholders want a clearance from HMRC prior to entering into the MVL. However no clearance mechanism is currently proposed which could deter some shareholders from undertaking commercially motivated business reconstructions, with adverse consequences for jobs and the economy.
The response also highlights concern that there is a likelihood that the new rules will drive increasing numbers of directors to use the 'striking off' provisions in the Companies Act 2006 rather than taking the proper route to wind up a company via liquidation. In conjunction with other legislative provisions this would allow up to £25,000 to be treated as a capital distribution on striking off. The proposed new provisions only apply to winding up and therefore the incentive to use the striking off approach will be increased.
David Menzies, Director Insolvency, said: "Given that there are always alternative ways of dealing with the end of a company the taxation consequences of each approach will inevitably be a consideration and a driver in making the final decision.
Those involved in legitimate solvent winding ups will therefore be concerned about possibly being caught by the proposed new rules. We believe that if the proposed amendments go ahead a clearance mechanism is essential."