Don’t get stuck on TAAR (Targeted Anti Avoidance Rule)

Donald McNaught

Donald McNaught

Restructuring Partner

Contractors wind-up their companies for many reasons, returning to permanent roles, opting to trade under an umbrella company, or even retirement. There are a variety of ways to close down a limited company and it’s important those involved take expert advice to ensure the best solution.

A new Targeted Anti Avoidance Rule (TAAR) was introduced in 2016 to target “phoenixing” (the use of voluntary liquidation to extract cash from a company, followed by a renewal of the same trade through another vehicle).

In short, HMRC want to ensure that an MVL (a Members’ Voluntary Liquidation) cannot be used simply for tax avoidance i.e. through closing down a limited company but then continuing the exact same business under another company, after extracting all the cash reserves from the original at a much lower tax rate. 

Withdrawal of funds from a limited company are now automatically considered as income, and subject to income tax, where all four conditions are met as follows:

  1.  The company must be a close company
  2.  The individual has at least 5% interest in the company
  3. The individual carries on the same or a similar trade or activity within two years of the distribution
  4. It is reasonable to assume, having regard to all the circumstances, a main purpose of obtaining a tax advantage

The first two conditions affect the majority of contractors. Whilst it can be argued tax isn’t the main purpose in closing a limited company, there is obviously going to be some element of tax within the decision.

Conditions three and four are manageable, however it is restrictive. It would result in not being able to trade using a limited company for two years following the MVL, which wouldn’t suit all contractors.  

It’s worth noting that HMRC are not seeking to apply the legislation where there is a commercial rationale such as retirement. 

Each case should be reviewed individually and a blanket approach is not appropriate in this situation.

Get in touch

The experienced team at Johnston Carmichael can help. Get in touch with me directly or another member of the Restructuring team for an initial, informal chat.