New TAAR for Personal Service Companies

23rd August 2016

New Liquidation Tax Rules: How to ensure capital tax treatment.
Most contractors will be aware that HMRC introduced a new targeted anti-avoidance rule (TAAR) wef 6-Apr-16, that will make it more difficult to obtain capital gains tax treatment when profits are withdrawn from a company by way of liquidation or dissolution. Four tests have to now be passed to avoid the capital distribution being liable to income tax as if it were a dividend.

HMRC have reported that they are now receiving a number of advance clearance requests from those about to liquidate or dissolve, who are seeking assurance that the TAAR will not apply to them. However, there is no statutory clearance procedure for this area of taxation, so HMRC are not able to directly respond. They are, however, now sending out a standard response letter and new guidance on the TAAR is being prepared, including giving 3 case examples.

It has been common practice with many contractors in the past to liquidate or dissolve an old company, when a contract ends, and to start a new contract in a new company. This enabled accumulated profits to be extracted tax efficiently and, in the eyes of many, it effectively buried any IR35 risk. HMRC have woken up to this tactic and now made it much more difficult to implement it effectively. So more care over commercial substance and timing will now be required, to pass the 4 new tests, and keep this procedure outside of the TAAR.

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