Change of trade and Transactions in securities conundrum

[MrC]

Appreciate your case is a little different, but I still feel that with something like this if you're asking in advance, to my mind it suggests you know you're at risk. Some would argue that's the risk with clearance requests more generally, you're basically flagging your case to HMRC as one that you accept yourself is borderline.

Some useful points Maslin.
Yes it's clear there is a risk but I don't agree that requesting clearance means it's perceived as borderline.

All you can say of someone requesting clearance is that they do not know how hmrc will rule on what is rather vague case law that is wide open to interpretation and they would like to know before acting.

I guess a lot of it comes down to need for certainty and risk adversity. A steady eddy might prefer the certainty of knowing the outcome that clearance affords while being willing to take the hit on increased likelihood of decline. A risky Rick might prefer to gamble the certainty for likely better financial outcome.

Anyone else know if penalties are further payable should it be ruled as a TIS?

[Maslins]

Re the OP generally, my personal thoughts would coincide with jamesbrown.

Re clearance, I'd suggest it's unlikely there have been (m)any re TiS on liquidation. Perhaps your situation isn't the most common one raised on this contractor forum...more commonly it's someone contracting for X years, gets offered a permie role, takes it, then 1-12 months later gets offered another contract. In those situations, surely the sole reason you're closing is that you DON'T anticipate contracting again (or at least you'll want to argue that's the case)...so doing a clearance request would be daft.

Appreciate your case is a little different, but I still feel that with something like this if you're asking in advance, to my mind it suggests you know you're at risk. Some would argue that's the risk with clearance requests more generally, you're basically flagging your case to HMRC as one that you accept yourself is borderline.

[jamesbrown]

What rates are you suggesting would be applicable?

Yes, I wasn't disagreeing on that point (as you say, the rates depend on your income), just noting that there will be an additional dividend tax from next April (details TBC).

ps. there may be penalties too; I'm not sure.

[MrC]

Sorry yes it is classified as a dividend. I'm arriving at the 25/30% from this page (except below)
What rates are you suggesting would be applicable?


http://www.taxation.co.uk/taxation/A...am-it’s-over

If HMRC successfully counteract the “tax advantage” under ITA 2007, s 684 they will issue a counteraction assessment under ITA 2007, s 698. The assessment would impose a quasi-dividend income tax charge on the amount represented by the company’s distributable reserves.

The shareholder would therefore suffer penal income tax rates at 25% and/or 30.56% (less a credit for any capital gains tax already paid).

[jamesbrown]

Thanks. Have there been many examples of pscs obtaining pre clearance of TIS in situations of closing companies and claiming ER?

Also am I correct in my understanding that if claiming ER and TIS being ok/violated I am looking at a tax burden of:

0% on CG allowance ~£11k, 10% tax thereafter
Vs
25%/ 32% (depending on marginal tax rate) penal dividend rates if disallowed.

???

Essentially, the TIS is designed to prevent a capital distribution for tax reasons rather than commercial reasons, so the comparison is between a capital distribution and a dividend distribution, not between a capital distribution with ER and a dividend distribution. The rules for ER are pretty straightforward and easy to meet. Yes, in simple terms, you're correct on the first scenario. The second scenario would involve a dividend distribution, so the gap will become even larger next year. Some of the MvL experts may have knowledge and examples of the clearance process, although they focus on the mechanics rather than eligibility, and I don't think the clearance process is widely used (much like the IR35 review service). I'd expect that it's difficult to obtain a definitive answer from HMRC, but I may be wrong.

[MrC]

Thanks. Have there been many examples of pscs obtaining pre clearance of TIS in situations of closing companies and claiming ER?

Also am I correct in my understanding that if claiming ER and TIS being ok/violated I am looking at a tax burden of:

0% on CG allowance ~£11k, 10% tax thereafter
Vs
25%/ 32% (depending on marginal tax rate) penal dividend rates if disallowed.

???

[TheCyclingProgrammer]

If it's being done for genuine commercial reasons and not to gain a tax advantage then in theory it shouldn't be caught.

Because it's not very well tested your options are ignore it and hope for the best or if you feel there is a risk, gain clearance from HMRC up front.

[jamesbrown]

Thanks for your input jamesbrown.

Limiting liabilities is a genuine major driver in the business decision and not an unreasonable one IMO.
There is also a minor issue of company A becoming tarnished both in my mind and external reputation due to the unsuccessful outcome of it's recent business. But i fully accept that this is my opinion.

I'm somewhat confused by the case law factor. I've read many things on this forum about tis being untested yet elsewhere on the wider web there appear to have been specific cases which have set precedents.

I'm just an interested bystander, certainly no expert on the broader case law surrounding TIS, but there are a few folks around here with a professional understanding. The TIS rules were changed significantly in 2010, and they are very broad in scope. I'm not aware of the general case law context, only the absence of any case law in relation to the scenario you present (i.e. winding up a company followed by issuing of shares in a new company with the same trade). You would not create a TIS in simply winding up A (this is established in case law). However, as you're starting B in the same trade to that of A (at least originally), there may be a TIS. Frankly, I'm not sure how much of a risk this presents in practice. I suspect it's quite small but, as I say, there's a default risk insofar as it's untested. Also, I believe there's a mechanism to obtain clearance, but I wouldn't do that without professional advice.

[MrC]

Thanks for your input jamesbrown.

Limiting liabilities is a genuine major driver in the business decision and not an unreasonable one IMO.
There is also a minor issue of company A becoming tarnished both in my mind and external reputation due to the unsuccessful outcome of it's recent business. But i fully accept that this is my opinion.

I'm somewhat confused by the case law factor. I've read many things on this forum about tis being untested yet elsewhere on the wider web there appear to have been specific cases which have set precedents.

[jamesbrown]

Your explanation doesn't really stack-up insofar as company A traded in X before it traded in Y and could've returned to trading in X. In principle, if you intended to achieve a tax advantage on the proceeds of trade X by closing company A with a view to restarting trade X through company B, it could be viewed as questionable. In practice, all of this is completely untested, and I really can't see it being tested on this sort of scenario, especially if you had a commercial reason for closing company A. As you said yourself, trade Y was unsuccessful, so it hardly comes across as a "clever ruse". My only question would be why you didn't continue to trade in X with company A.

My guess is that you transitioned to Y, found it unsuccessful, and then realised that, rather than transition back to X using A, there might be a tax advantage in closing A and trading X through B. In other words, if you're being honest, it's nothing to do with "chosen to limit liabilities and keep accounting separate", is it? That being said, I can't see anything like this being pursued as a test case. Obviously, this is just my opinion; there are better opinions (), but there are no opinions based on case law.

[MrC]

Anyone have any thoughts or are the black Friday deals just too distracting?

[MrC]

Some years ago company A forms, carries out trade X and amasses some retained profits.
About a year ago the trade of company A begins to transition to trade Y and is fully changed over within 3 months. There is a trail of evidence to support this.

Recently company B is formed. Company B carries out trade X. A new company is chosen to limit liabilities and keep accounting separate.

It becomes clear that Trade Y is commercially unsuccessful and thus company A is no longer justified.

If in a few months time company A is closed with ER distribution. Assuming that the companies have same ownership/ board/share structure is this likely to be caught by the transactions in securities (tis) legislation?


I appreciate that tis is somewhat subject to interpretation and do there will be few absolute answers. I'm after opinion and any relevant examples which suggest whether this represents violation of tis. I know that this legislation is undergoing review so let's stick to 'as is' rather than 'to be'.

So whadya think? Is this caught by tis?

Read online that some tax specialists recommended asking hmrc if a transaction falls foul of tis and gaining pre approval- anyone heard about pscs doing this?