Finance Bill 2016: distributions on a winding up

Briefing document submitted to MPs on clause 35

The Tax Faculty has submitted ICAEW rep 96/16, a briefing for MPs ahead of the Public Bill Committee on clause 35: distributions on a winding up.

Clause 35 introduces new sections 396B and 404A into the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and a new targeted anti-avoidance rule (TAAR) which seeks to prevent distributions on a winding up being treated as capital distributions in certain situations. Although we welcome measures to prevent abuse of the legislation, the changes brought in by the new clause could negatively impact some genuine commercial transactions.

In our briefing we highlighted a number of concerns including the ambiguity within Condition C (new section 396B(4)), which states that the person who receives the distribution may be caught if at any time in the two years following the receipt, they are involved with the carrying on of a trade or activity that is similar to that of the trade or activity carried on by the company wound up. There are a number of uncertainties within this new section:
We believe the phrase “involved in” is unclear and would request this is more clearly defined. Would, for example, a father who winds up his company, be penalised if he later offered some business advice to his son who carried on a similar trade?

  • The term “similar” and “activity” must also be defined. We are concerned that individuals will be penalised for setting up businesses in the future that may offer services which represented only a small part of the previous company’s trade (e.g. a company that had an accountancy practice is liquidated and an ex-shareholder who was the tax ‘partner’ decides to continue to offer tax advice)
  • How far back should the company’s previous trade be relevant for comparisons? For example, would the activities that the company carried on some years previously be a problem, or only those activities carried on just before the winding up? We wonder whether inserting a two-year period prior to the commencement of the winding up would be a sensible legislative solution?

We also raised the issue of clearances and have requested that any formal clearance obtained under s701, ITA 2007 will also be treated as satisfying the TAAR.