TAAR condition C (and D)

[Lance]

Scenario....

Plan B coming along nicely. Provides managed services to clients, and some professional services. Me and 2 co-directors/shareholders.
The professional services work is kinda similar to my own LTD. company. (LTD A), but also different services. And will not be reliant entirely on me.
Plan B will have a larger client base than LTD A. And will offer a broad range of managed services (multi-year contracts with SLAs and staff to service them).
The aim is to make Plan B worth multi-millions over the next 5,6,7 years and then sell it.

On the face of it, and reading the very broad examples HMRC write, if I either wind-up LTD A, or sell it to plan B, then TAAR will apply to the distribution.

But that is surely not the intention???? The point of condition D is to prevent the winding/sale being done on a purely tax avoidance basis, when the actual reason is to get rid of LTD A as I move entirely into Plan B.

And condition C is pretty vague, but surely a one-man band time and materials consultancy is a very different business to a managed services business with SLAs and multi-year support contracts.


If faced with a very large dividend tax bill I am likely to keep LTD A as a non-trading company and simply drain £40k a year into pension over the next few years.


The question is have I missed something?
And yes I will seek proper legal advice as the time approaches.

It also occurs to me that if I sell LTD A to Plan B, and take the cash but don't wind it up, what are the real chances of a TAAR investigation? What triggers a TAAR? Is it winding up/liquidation, or a CGT declaration?

[jamesbrown]

If you're being honest about tax not being a motivation, then there's a really simple way to "get rid of plan A" and that is to distribute everything as a dividend and then submit a DS-01. I doubt you are missing this and hence I doubt you are being completely honest about your motivation. More likely, it is partly about winding up, but mainly about extracting the retained profits as a capital distribution. You also mention "a very large dividend tax bill", so that pretty much confirms it.

Anyway, yes, this would be caught in my view. Condition C is very broadly drawn, not so much vague as expansive.

The trigger is most likely your SATR, I would guess, where I expect you additionally plan to claim BADR, but another trigger could be your final company accounts. Anyway, the triggers don't really matter, HMRC has a lot of information to hand.

[jamesbrown]

surely a one-man band time and materials consultancy is a very different business to a managed services business with SLAs and multi-year support contracts.

To clarify, it will be HMRC's position that moving from IT consultancy to computer hardware sales is caught (), so moving from one-off IT consultancy to packaged IT consultancy/solutions is well within scope, absolutely no doubt about that. If you're using your current, tradeable, skillset for the same or a similar trade or activity post liquidation, that is caught in terms of C.

[Lance]

If you're being honest about tax not being a motivation, then there's a really simple way to "get rid of plan A" and that is to distribute everything as a dividend and then submit a DS-01. I doubt you are missing this and hence I doubt you are being completely honest about your motivation. More likely, it is partly about winding up, but mainly about extracting the retained profits as a capital distribution. You also mention "a very large dividend tax bill", so that pretty much confirms it.

Anyway, yes, this would be caught in my view. Condition C is very broadly drawn, not so much vague as expansive.

The trigger is most likely your SATR, I would guess, where I expect you additionally plan to claim BADR, but another trigger could be your final company accounts. Anyway, the triggers don't really matter, HMRC has a lot of information to hand.

I had thought the point of condition D was about closing a company and reopening another. An actual "phoenix" of the business so to speak.
What I cannot get my head round is where it works in an M&A scenario. Which is one of the options I'm considering. If Plan B buys LTD A then that is an acquisition. I cannot grasp how that is not a capital gain.

Plenty of M&As require the shareholders of the bought company to remain in positions of control for a time period after the sale as part of the sale. They still get capital gains rather than dividends.
Somewhere between a basic phoenix and a far larger M&A there is a cutover where TAAR doesn't apply. What is the mechanism that drives that? Or is there just too little case law on the subject?


Reading this CTM36340 - Company Taxation Manual - HMRC internal manual - GOV.UK (www.gov.uk)
it's almost as if they want you to get lawyered up as it is very vague....

• Is there a tax advantage, and if so, is its size consistent with a decision to wind-up a company to obtain it?
• To what extent does the trade or activity carried on after the winding-up resemble the trade or activity carried on by the wound-up company?
• What is the involvement in that trade or activity by the individual who received the distribution? To what extent have their working practices changed?
• Are there any special circumstances? For example, is the individual merely supplying short-term consultancy to the new owners of the trade?
• How much influence did the person that received the tax advantage have over the arrangements? Is it a reasonable inference that arrangements were entered into to secure this advantage?
• Is there a pattern, for instance have previous companies with similar activities been wound-up?
• What other factors might be present to lead to a decision to wind-up? Are these commercial and independent of tax benefits?
• Are there any events apparently linked with the winding-up that might reasonably be taken into account? For example, was the only trade sold to a third party, leaving just the proceeds of the sale?

none of those factors have a value to measure against so are completely subjective.

[Lance]

To clarify, it will be HMRC's position that moving from IT consultancy to computer hardware sales is caught (), so moving from one-off IT consultancy to packaged IT consultancy/solutions is well within scope, absolutely no doubt about that. If you're using your current, tradeable, skillset for the same or a similar trade or activity post liquidation, that is caught in terms of C.

the bold bit is interesting. Plan B would not be me selling what I can do. My skillset is immaterial. It's what the services the company offer and for what price. In most cases I wouldn't be doing it anyway as we have minions.

[jamesbrown]

the bold bit is interesting. Plan B would not be me selling what I can do. My skillset is immaterial. It's what the services the company offer and for what price. In most cases I wouldn't be doing it anyway as we have minions.

Yeah, but you're still using your skillset. Otherwise, why do they want you? You may not be using it directly, but indirectly.

Regarding sales as opposed to liquidations, I think that applies in principle too, otherwise the TAAR would be easy to circumvent. It definitely won't apply to a sale when you don't continue to control/influence the business that acquired it, likewise a liquidation when you don't continue the same or a similar trade or activity through a different company. Presumably, being employed by the business that acquired your business would be fine, so that may be the way to go.

There is also the GAAR that could apply when the TAAR doesn't apply, I suppose. Anyway, I agree with your earlier post about getting expert advice but, even then, it's a grey area with little relevant case law for us, so you probably want to take it conservatively. In your example, Condition C would apply, and I think you'd be caught by the TAAR for either a sale or a liquidation, but I am less familiar with how it works for sales. I vaguely recall some examples from HMRC, some of which illustrated sales as distinct from liquidations, but I could be misremembering that.

[jamesbrown]

Some useful discussion here:

https://www.icaew.com/technical/tax/...n-a-winding-up

Prompted by this:

https://www.gov.uk/guidance/attempts...p-spotlight-47

HMRC indicated that the result of any case would depend on the particular facts, but we understood that the gist of their feeling was that selling shares in a company as an alternative to liquidation would be unlikely to reduce any uncertainties around whether the TAAR or GAAR would apply.

HMRC's view is just their view, of course. Also, your situation has a clear commercial motivation, it is not an avoidance scheme. Still, I refer back to being "conservative", especially given the hyper aggressive way in which HMRC has been operating of late w/r to contractors (e.g., MSC legislation), which will probably only increase post-pandemic.

[Lance]

Some useful discussion here:

https://www.icaew.com/technical/tax/...n-a-winding-up

Prompted by this:

https://www.gov.uk/guidance/attempts...p-spotlight-47



HMRC's view is just their view, of course. Also, your situation has a clear commercial motivation, it is not an avoidance scheme. Still, I refer back to being "conservative", especially given the hyper aggressive way in which HMRC has been operating of late w/r to contractors (e.g., MSC legislation), which will probably only increase post-pandemic.

thanks. Useful thoughts.