Anti phoenixing rules - new contract outiside IR35

[passerby]

Well, I closed my company by MVL, received a big distribution in October 2021 and a small one in June 2022. They were meant to be capital distribution to be taxed at 10% (ER).

By the looks of it, i can reclassify the second distribution as dividend and then start a ltd co in October 2023.

[jamesbrown]

Well, I closed my company by MVL, received a big distribution in October 2021 and a small one in June 2022. They were meant to be capital distribution to be taxed at 10% (ER).

By the looks of it, i can reclassify the second distribution as dividend and then start a ltd co in October 2023.

I would solicit professional advice on that. I suspect it's asking for extra scrutiny and perhaps an argument from HMRC that that the first distribution was effectively a dividend too. Bottom line, you (along with many others) screwed up and you should probably take your medicine or, at the very least, get advice from someone that actually knows what they're talking about (i.e., not an accountant when it comes to complex tax questions).

[Fred Bloggs]

I would solicit professional advice on that. I suspect it's asking for extra scrutiny and perhaps an argument from HMRC that that the first distribution was effectively a dividend too. Bottom line, you (along with many others) screwed up and you should probably take your medicine or, at the very least, get advice from someone that actually knows what they're talking about (i.e., not an accountant when it comes to complex tax questions).

Sounds like that's about the measure of it. Surely, it's either a legitimate MVL or it isn't. So, saying the first distribution was an MVL but the second distribution wasn't an MVL, well that just doesn't really add up. Does it?

[northernladuk]

Well, I closed my company by MVL, received a big distribution in October 2021 and a small one in June 2022. They were meant to be capital distribution to be taxed at 10% (ER).

By the looks of it, i can reclassify the second distribution as dividend and then start a ltd co in October 2023.

I don't know much about MVL so would be interested to know about this reclassification? Surely to be a dividend then its needs proper approvals from the business but if that business has now gone you can't raise the proper approvals for the dividend? Doesn't sound right that you can reclassify so far after it's been paid.

Also what FB says above. Doesn't sound right and even if possible it's going to attact attention isn't it?

Anyway, if you can't and you want to start the LTD 2 years after the first but under 2 years of the second distribution that 2nd distribution will be at risk. The 2 years starts from each distribution. The only way to be safe is to start 2 years after the most recent distribution.

[Lance]

I don't know much about MVL so would be interested to know about this reclassification? Surely to be a dividend then its needs proper approvals from the business but if that business has now gone you can't raise the proper approvals for the dividend? Doesn't sound right that you can reclassify so far after it's been paid.

you are right. It shouldn't be possible to retrospectively reclassify capital as dividends.

However... if you are caught by TAAR HMRC will make you pay the tax difference. On that basis, changing the method later, and paying that same tax as dividends is going to prevent HMRC doing anything surely? They're not going to pursue you for paying the correct tax, albeit the wrong way. They can't chase you for fraud, evasion or penalties so on what basis would it actually be a problem? They're not going to try and get you banned from being a director for paying the right tax are they?

[Fred Bloggs]

you are right. It shouldn't be possible to retrospectively reclassify capital as dividends.

However... if you are caught by TAAR HMRC will make you pay the tax difference. On that basis, changing the method later, and paying that same tax as dividends is going to prevent HMRC doing anything surely? They're not going to pursue you for paying the correct tax, albeit the wrong way. They can't chase you for fraud, evasion or penalties so on what basis would it actually be a problem? They're not going to try and get you banned from being a director for paying the right tax are they?

I'm not sure anyone disagrees with you.

What I think is wrong is (as was proposed up there) pretending half the distribution was under MVL and the second half was a dividend. It's either MVL or dividend. It can't be both. From a layperson's point of view admittedly. But then, maybe it can?

[Lance]

I'm not sure anyone disagrees with you.

What I think is wrong is (as was proposed up there) pretending half the distribution was under MVL and the second half was a dividend. It's either MVL or dividend. It can't be both. From a layperson's point of view admittedly. But then, maybe it can?

whether you can split it is not something I am sure about.
I am sure that if you can split it, that you cannot do capital before a dividend. You cannot issue a dividend from a company that no longer exists.

[Fred Bloggs]

whether you can split it is not something I am sure about.
I am sure that if you can split it, that you cannot do capital before a dividend. You cannot issue a dividend from a company that no longer exists.

Exactly. And that is one of the reasons it's an appalling plan. The OP isn't on their own though. There's lots of folk out there regretting MVLing their company for a quick few quid. It seems.

[jamesbrown]

As I said above, you'd need to get expert advice on this, but it would probably make you a target and warrant additional scrutiny into your tax affairs at the very least. Obviously, you can only receive a dividend from an open company with distributable reserves, but I don't think that is the question, it's instead whether the effects of the TAAR can be nullified as it relates to the 2-year rule (Condition C) on the second distribution by paying income (dividend) tax on that distribution, voluntarily. If you read the four conditions of the TAAR and the two exemptions (share capital and irredeemable shares) at face value, it's hard to be sure. The conditions are written as they apply to a specific distribution, but they also relate to a tax advantage overall. Again, as a non-expert, my advice would be to chalk this one up to inexperience and wait until later in 2024 before opening another company.

[Maslins]

This is an area where there's a difference between strict legal form, and tax treatment. In this respect, it's similar to IR35, where HMRC basically say "you may well have invoiced via a company, but you act like an employee, so we'll tax you like one".

Ie HMRC's reasonably common "if it looks like a duck, waddles like a duck, and quacks like a duck...it's a duck."

The TAAR is pointing out that even if you get a liquidator involved and do a legally valid MVL, if you then restart soon after with a similar trade, the liquidation distributions look very much like dividends from an ongoing trading business. Taking a step back and looking at the bigger picture:
- you were trading as (say) an IT contractor,
- you're now trading as an IT contractor following a short break,
- you've withdrawn retained profits at various points across that timeline,
- this all sounds like dividends from an ongoing business, and the fact that some were paid out by a liquidator doesn't change that.

Similarly the fact the liquidator would have done a distribution notice, and there would be no dividend voucher, doesn't change this. Same way a worker deemed inside IR35 who didn't run a high value payroll and may well have produced lovely dividend vouchers still gets taxed as if it were salary, and the dividend vouchers disregarded.


The TAAR hasn't been tested in court (and unlikely will be for years, if ever), but my understanding is:
- the distribution notice date is the trigger date from a tax perspective.
- if that's >2 years ago, it should be safe from challenge under the TAAR.
- if that's <2 years ago, you can press ahead with the new biz, but unless you're confident you can argue your trade is significantly different or some other get out, it should be taxed as dividends.

I therefore don't see an issue with someone setting up a new biz (say) 25 months after first distribution, (say) 20 months after second distribution, and for personal tax purposes treating the first as CGT, second as dividend. They're agreeing the second distribution would've got a tax advantage had they treated it as CGT, it did breach the TAAR, so it shouldn't get the CGT tax advantage, hence voluntarily treating as dividends.

I don't see this adding any risk to the treatment of the first distribution (which was >2 years so doesn't breach the TAAR).