Members’ voluntary liquidations – tax changes from 6 April 2016

Donald McNaught

Donald McNaught

Restructuring Partner

30 November 2016

Key changes to the tax treatment for individual shareholders receiving a distribution via a Members' Voluntary Liquidation (MVL) came into effect on 6 April 2016.

The Finance Bill 2016 clarified the application of Transaction in Securities (TIS) anti-avoidance legislation to specifically include liquidations.  Additionally, a new Targeted Anti Avoidance Rule (TAAR) was introduced 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).

The TAAR only applies where all four conditions are met as follows:

A – The company must be a close company

B – The individual has at least 5% interest in the company

C - The individual carries on the same or a similar trade or activity within two years of the distribution

D - It is reasonable to assume, having regard to all the circumstances, a main purpose of obtaining a tax advantage


Broadly, these rules look to subject individuals to Income Tax on value received from a winding up where there has been a Tax Avoidance/Reduction motive.  The rules have been drawn widely and have therefore provided some uncertainty on how these could be applied by HMRC.  Where there is uncertainty on the application of TIS legislation, we recommend that clients obtain a HMRC statutory clearance to ensure the proposed transaction does not fall within the scope of the legislation. However, this will not cover the phoenixing rules.

In relation to the new TAAR there is no ability to obtain a statutory clearance.  The alternative is to seek a non-statutory HMRC clearance if the taxpayer wants to establish a similar trade within two years of winding up their company, however, HMRC will only provide this where there is uncertainty on the interpretation of law and may refuse to comment.

Note that the TAAR does not prevent the taxpayer simply taking up employment with a third party employer in the same business sector (HMRC will be happy to receive PAYE and NIC). ‘Third party employers’ generally exclude businesses owned by the taxpayer or  those with close connections to him or her.

Latest HMRC Guidance

HMRC recently advised that they will not give a non statutory clearance under TAAR. However, HMRC have produced some guidance on when the rules will apply as noted below.

HMRC guidance confirms that Condition C (above) will be widely construed. However, the "main purpose" test in Condition D limits the application of the rules to situations where a tax avoidance motive exists (despite the fact that Condition C is met). The letter (see link below) also contains some useful illustrative examples of the application of the new rules and confirms that HMRC will publish guidance "within the next few month”.

A copy of HMRC’s letter can be found at - HMRC Guidance on winding up.

Our Approach

This guidance provides some clarity that HMRC are not seeking to apply the legislation where there is a commercial rationale such as retirement. However, each case should be reviewed individually and a blanket approach is not appropriate for this work.  In particular, HMRC have not provided any guidance on property development phoenixing but commentary remains to suggest that the ring fencing of risk/financing should satisfy HMRC that Condition D is not met.

As a firm our approach will be to remain vigilant and advise clients of the scope of legislation and our view of the risk in their individual case. In addition we will continue to recommend statutory clearances for TIS and where appropriate non-statutory clearances for Entrepreneurs’ Relief. 

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