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Phoenix companies & tax: extinguishing the flames of Finance Act 2016?

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Background

The recent Finance Act contains provisions designed to bolster the Transactions in Securities rules and revisions to the tax treatment of distributions made on a winding up of a Company.

These new tax rules will potentially apply to so-called phoenix’ companies and money-box companies.

The impact of the changes – a recap

Prior to the changes, where a distribution was made in pursuance of a solvent liquidation (“MVL”), the resulting capital distribution would usually be brought within the capital gains tax regime.

The new changes will impact distributions made post 6 April where the relevant conditions apply. There conditions are set out in our earlier article on this issue.

Where these rules do apply, they will seek to tax the distributions made under a MVL as an income distribution rather than a capital distribution. Effectively the member is treated as receiving a normal dividend. The tax rates then become a little more eye watering up at 38.1% for additional rate taxpayers.

What can be done?

Property developers – Simple Group Structure

As noted, historically property developers have looked to operate through SPVs for commercial reasons. For example, they wish to isolate the risk of a development within an SPV and not potentially polluting future projects.

Of course, where this is the overriding purpose then it may not, on review of the conditions be within the scope of these targeted avoidance provisions. However, HMRC may have a different view and with no formal clearance procedure one is relying on HMRC providing a non-statutory clearance. Indeed, where we have made such applications HMRC’s response is a rather unhelpful standard reply with some (rather obvious) examples of what is, and is not, within this safe harbour.

Alternatively, one might look to operate through a holding company, with that Company holding the shares in subsidiary SPVS who in turn carry out the specific projects. This would allow, say, SPV A to be liquidated on completion of project A once it has paid its corporation tax. The holding company could then receive the resulting distribution free of tax (as corporate entities do not pay tax on the receipt of such distributions). It could then reinvest the gross proceeds in new SPV B to commence project B.

Alternatively, one might look to effect a sale to an unconnected party (see below)

Sale to a third party

It is unlikely that a contractor who is looking to act as he might have done prior to the rule change is likely to get a positive view from HMRC that his phoenix-ing arrangements are on a commercial footing.

If he wishes to dispose of the business, take the cash as a capital sum and avail himself of Entrepreneurs’ Relief then he must consider other means.

The easiest route would be to sell the shares in the Company to a third party. As, quite simply, there is no ‘distribution on a winding up’ the rules will not apply.

Of course, if there is an attractive business that could be operated as a going concern by a new owner, then a general third party sale may be in the offing.

However, in many circumstances, it might be unlikely that a sale to such trade buyer is unlikely or undesirable. Even so, it may be possible to create a sale to a ‘friendly’ party and still lock in the benefits of capital treatment and the benefit of Entrepreneurs’ Relief. There are, of course, many issues to consider in this area and the precise route will depend on the specific facts.

 

If you have any queries on this article then please get in touch.

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