Entrepreneurs looking to liquidate before April to avoid tripling tax bills

Where single individuals or small groups of people control companies they have the option to extract profits as remuneration or dividends, subject to income tax, or to retain profit within the company - extracting it at some later date as a capital distribution subject to gains tax at rates as low as 10% where entrepreneurs' relief is available ("Moneyboxing").

In the autumn statement, the Government published plans to increase the rate of income tax that would be charged on company dividends - meaning that the income tax payable could exceed 30% and potentially increasing the incentives for Moneyboxing.  The Government is concerned that if Moneyboxing were to be used repeatedly, by liquidating an existing company with retained profits and replacing it with a new company with the same activities ("Phoenixing"), this could give rise to unacceptable tax avoidance.

To address this, the Government issued a consultation document before Christmas on changes to the tax rules governing company distributions to be put forward in the Finance Bill 2016.  The consultation closes on 3 February 2016.

The Government is proposing a new Targeted Anti-Avoidance Rule ("TAAR") to apply to distributions from a solvent liquidation.  Under the TAAR, a distribution from a solvent liquidation after 5 April 2016 would still be treated as income, as opposed to capital, in the following circumstances.

• Within two years after the winding up, the recipient continued to be involved in a similar trade or activity.
• The main purpose, or one of the main purposes, of the liquidation was to obtain a tax advantage.

On Thursday 7 January 2016, the Financial Times reported that, in response to the proposed changes, "thousands of entrepreneurs are expected to liquidate their companies over the next three months amid fears that an imminent tightening of the tax rules will more than triple their bills".

Anyone interested in exploring the option of putting their company into solvent liquidation ahead of the proposed changes is invited to contact Peter Whalley on 020 7242 2109 or Richard Warwick 023 8021 0856.