You're right, it's the fourth condition. It was condition C but the final legislation has it as condition D.
This is not a question of HMRC's "guidance", however. It's actually in the legislation. Wording:
The purpose of using ER is to reduce income tax, no doubt.
But if he went permie and stayed permie for more than a year, ending only when he was made redundant, it would be silly to argue that the main purpose of the winding up was to avoid tax. Maybe if he took voluntary redundancy you could argue that, he took his cash and then jumped at the first chance. But if he's made redundant involuntarily, then it is an easy argument to win. It is not reasonable to assume that he wound up his company to save tax. It is reasonable to assume he wound it up because he thought he didn't need it anymore and he didn't want to go on paying accountancy fees, etc. It is reasonable to assume that he intended to continue as a permie for two years and more, and still would be if something unforeseen hadn't happened.
Yes, there's an element of risk, but unless there's a lot of tax at stake it's a risk personally I would take. They've tried to scare people into viewing the 2 years as a hard and fast rule, and they aren't likely to chip away at that by taking on a case that is likely to set a precedent undermining that fear. I think it is very unlikely they would challenge this because of the fear they would lose and that it would become a bad and publicised precedent. And I think it is very unlikely he would lose if they did challenge it (assuming we are getting the whole story).
Everyone's tolerance to risk varies, though.
This is not a question of HMRC's "guidance", however. It's actually in the legislation. Wording:
(5)Condition D is that it is reasonable to assume, having regard to all the circumstances, that—
(a)the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or
(b)the winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax.
(a)the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or
(b)the winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax.
But if he went permie and stayed permie for more than a year, ending only when he was made redundant, it would be silly to argue that the main purpose of the winding up was to avoid tax. Maybe if he took voluntary redundancy you could argue that, he took his cash and then jumped at the first chance. But if he's made redundant involuntarily, then it is an easy argument to win. It is not reasonable to assume that he wound up his company to save tax. It is reasonable to assume he wound it up because he thought he didn't need it anymore and he didn't want to go on paying accountancy fees, etc. It is reasonable to assume that he intended to continue as a permie for two years and more, and still would be if something unforeseen hadn't happened.
Yes, there's an element of risk, but unless there's a lot of tax at stake it's a risk personally I would take. They've tried to scare people into viewing the 2 years as a hard and fast rule, and they aren't likely to chip away at that by taking on a case that is likely to set a precedent undermining that fear. I think it is very unlikely they would challenge this because of the fear they would lose and that it would become a bad and publicised precedent. And I think it is very unlikely he would lose if they did challenge it (assuming we are getting the whole story).
Everyone's tolerance to risk varies, though.
As I said, the legislation includes a "main purpose" test, which is precisely the point I am making about subjectivity. This is why it's an issue of "guidance" w/r to how it might be applied to contractors, but you simultaneously cannot rely on any guidance from HMRC. If you were to rely on it, the preliminary examples cited by HMRC (which are available online if you want to search for them) would favour your interpretation in the case of the OP. I am saying that the OP would be on uncertain ground and that it would be sensible to go with an umbrella, especially towards the end of the two-year period.
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