Finance Bill

Written Evidence from the Association of Taxation Technicians (ATT)

Finance Bill 2016: Clause 35 – Distributions in a winding up

A Introduction

1. Paragraph 1 of the Explanatory Note indicates that Clause 35 "introduces a new Targeted Anti-Avoidance Rule (TAAR) that will apply to certain company distributions in respect of share capital in a winding up.

2. Where the relevant conditions are met, the TAAR requires the distribution from the winding up to be treated as if it was a distribution chargeable to Income Tax (like a company dividend).

3. The TAAR applies to distributions made on or after 6 April 2016.

4. As there is no indication to the contrary, the TAAR requires taxpayers to self-assess their tax liabilities in accordance with its provisions if the relevant conditions are met.

5. The ATT has major concerns about:

· the imprecision of language;

· the complexity of the connection tests; and

· the inclusion of what effectively amounts to the rebuttable presumption of a main purpose of tax avoidance – which puts the taxpayer who wishes to contend that the TAAR conditions are not met in the position of having to prove a negative.

6. These concerns are given added significance by the absence of any clearance procedure.

B ATT comments

1 The ATT’s concerns were set out fully in a response to the consultation document Company Distributions that was published by HMRC on 9 December 2015 together with draft versions of what form clauses 33, 34 and 35 of Finance Bill 2016. [1]

2 As the ATT response to the HMRC consultation addressed the draft versions of two clauses other than what has become Clause 35 and as the Clause 35 provision includes some differences from the earlier draft version, the following Appendix comprises an updated extract of that response.

3 None of the ATT’s concerns about the original draft provisions has been addressed in the current version of Clause 35. In particular, no clearance provision has been included.

July 2016

Attached Appendix:

Extract from ATT’s response of 2 February 2016 to the HMRC consultation Company Distributions

Appendix to Written Evidence

Extract from ATT’s response of 2 February 2016 to the HMRC consultation Company Distributions

(Note: This extract has been updated to reflect the current wording of Clause 35.)

3.3. Our concerns with Clause 35 centre upon Conditions C and D (draft sections 396B(4) and (5)). They are detailed below.

3.3.1. All four of the scenarios within the ambit of Condition C depend on the carrying on of "a trade or activity which is the same as, or similar to, that carried on by the company" which was previously wound up giving rise to a distribution. The term ‘similar to’ is far too imprecise for the proposed legislation to have certainty.

Taking the 396B(4)(a) type scenario as an example, would Condition C be met:

(a) If the trade of the company had been retail butchers but the individual’s new activity was wholesale butchery?

(b) If the trade of the company had been retail sale of high-end fashion items which had been bought in whereas the individual’s new activity was bespoke design, tailoring and sale of high-end fashion items?

(c) If the trade of the company had been the provision of IT consultancy services to local authorities in Scotland but the individual’s new activity was the provision of the same type of services to (say) charities in Wales?

(d) If the trade of the company had been the retail sale and servicing of electric bicycles whereas the individual’s new activity was the retail sale and servicing of ordinary (non-electric) bicycles?

[Added comment by ATT – the above examples are intended to highlight the uncertainty created by the loose phrase "a trade or activity which is the same as, or similar to, that carried on by the company". The four examples illustrate (1) how there could be significant differences between two businesses in terms of their markets, production methods, geographical locations or retail products (meaning that the two businesses are not the same trade for tax purposes - for example in relation to the availability of loss relief) but (2) how they might nevertheless be reasonably regarded in everyday language as ‘similar to’ each other.

In order to reduce the resulting uncertainty and support the targeting of Phoenix-type liquidations, either the terminology should be tightened or a clearance procedure should be provided.]

3.3.2. Section 396B(4)(c) requires consideration of whether the individual or a person connected with the individual who received the distribution in the winding-up is within the following two years a participator in a company which carries on the same or similar trade. This prompts the following questions:

3.3.2.1. Does Condition C only apply if the (successor) company referred to in section 396B(4)(c) is also close? The draft provision does not make this clear.

3.3.2.2. Would Condition C apply even if the individual or the person connected with them was already a participator in the company referred to in section 396B(4)(c) at the time when the company referred to in Condition B (the company which was wound up) made a distribution to the individual in the course of that winding up?

3.3.2.3. The Explanatory Note does not make it clear what determines whether a person is ‘connected with’ the individual who received the winding-up distribution. However, we take it that the relevant definition for the purpose of section 396B is that in section 993 of ITA 2007 (by virtue of section 878(5) of ITTOIA 2005). This is a very broad definition and includes for example that A and B are connected where A is the spouse or civil partner of a relative of B's spouse or civil partner (see section 993(1)(e) ITA 2007). We comment below on the significance of this breadth of definition in relation to Condition D.

3.3.2.4. Section 396B(4)(c)(ii) extends the breadth of Condition C by applying it where the person with whom the individual is connected is a participator in a company which is itself (we assume under section 993(5) of ITA 2007) connected with another company which carries on such a trade. By adopting the definition of "participator" found in section 454 of CTA 2010, Condition C would accordingly appear to be satisfied if the individual who had received the distribution was ‘connected with’ (see 3.3.2.3 above) an individual who held share options in a totally unrelated company which happened to be controlled by another individual who was in turn connected with persons who controlled another company which carried on a trade which was the same as or similar to that previously carried on by the company which had made the distribution. Given such an extended chain of connection, it is difficult to imagine how the individual receiving the distribution might be expected to establish for Self Assessment purposes whether or not Condition C was satisfied.

3.3.3. The proposed section 396B(4)(d) envisages Condition C being met where the individual is "involved with" the carrying on of such a trade or activity by a person connected with the individual. We have been unable to find a definition for the term "involved with". It appears to be extremely vague.

Would the individual who had received the distribution in the winding-up be involved with the carrying on of such a trade or activity by a person with whom they were connected if:

(a) The individual gave some advice on an unpaid basis concerning the general operation of such type of business?

(b) They worked in the business but purely on normal terms of employment and without any beneficial interest in the business?

(c) They lent money to the business on normal commercial terms?

(d) They either supplied goods or services to or acquired them from the business?

Without a tighter wording, we can envisage HMRC officers, HMRC’s customers (and their advisers) and the tribunals and courts having significant difficulty in determining whether Condition C had been met through section 396B(4)(d).

3.3.4. The significance of the breadth and uncertainty of the terms used within Condition C is critical to the operation of Condition D because proposed section 396B(6) requires that if Condition C is met then that is a strong indicator that it is reasonable to assume that a main purpose of the winding up was the avoidance or reduction of a charge to income tax. We understand the intention of the provision to be that there is effectively a rebuttable presumption that avoidance or reduction of income tax was a main purpose. That is not, however, altogether clear from the draft provision and we think that it is essential that the point is clarified. As drafted, it rather looks as if Condition D is something of a formality and that fulfilment of Condition C automatically means that Condition D is also met.

3.3.5. What slightly tempers the potentially arbitrary nature of Condition D is that it does require "regard to all the circumstances". However, there could be significant practical difficulties in establishing what were the relevant circumstances when assessing the reasonableness or otherwise of the presumption that there was a main purpose of income tax avoidance or reduction. This, coupled with the concerns which we have expressed above about the imprecision of terminology (3.3.1 above), the complexity of the chain of connection (3.3.2 above), and the absence of any definition of ‘involved with’ (3.3.3 above) highlights the risk that the Clause 35 provisions have the potential to:

3.3.5.1. require individuals who have received a distribution in a winding up to commit significant time and effort to establishing whether Condition C is met in order that they can correctly complete a self-assessment tax return (or tax account equivalent) even when there will in many cases be no question of the provisions actually applying (as the Condition D presumption will on the facts be rebuttable);

3.3.5.2. result in incorrect returns because individuals who have received distributions will be unaware that the complexities of Condition C bring them within the ambit of the Clause 35 provisions;

3.3.5.3. require both HMRC and the relevant individual to commit significant time and resources to enquiries as to whether or not Condition C and/ or D are satisfied in any particular case including many where the eventual conclusion will be that the Clause 35 provisions do not apply.

3.3.6. In our opinion, the risks identified in 3.3.5 above could best be avoided (or at least be significantly reduced) by the provision of a clearance provision. We were therefore very concerned to learn at the Meeting [2] that there was no proposal to include a clearance facility in respect of the Clause 35 provisions. In our opinion, the absence of any such facility will result in a significant waste of resources by both HMRC and taxpayers.

3.3.7. We think that consideration should be given either to the inclusion of a conventional clearance procedure on the lines of section 701, ITA 2007 or possibly to the provision of an electronic decision tree [3] which an individual or their agent could complete and which would generate one of the following alternative conclusions:

• "By reference to your answers, you do not need to report the distribution in the winding-up as an income distribution. You must, however, indicate the reference number [XXXXXXX] in [Box XXX] of your return."

• "By reference to your answers, the distribution may need to be treated as an income distribution. Whichever way you report it on your return, please indicate the reference number [XXXXXXX] in [Box XXX] of your return. If you do not consider that an income treatment is appropriate for the distribution, please indicate your reasons in [the White Space section]."

As you will gather, the intention behind the decision tree facility is to eliminate unnecessary enquiries (at the same time as self-registering the potential relevance of the Clause 35 provisions) and to alert HMRC to situations where the provisions are more likely to be of relevance. Our suggestion would obviously require refinement but it seems to us that it would fit with the Promote, Prevent, Respond approach and the general move towards digitalisation of tax.

3.3.8. A question was asked at the Meeting2 about the availability of the non-statutory clearance route in Clause 35 situations. The answer given was that there was a well understood exclusion of such clearances where the arrangements constituted tax avoidance. We understand that answer but we are not convinced that it responds to the question. Any request for such a clearance would be for confirmation that particular circumstances did not involve tax avoidance. As such, we would not see them as excluded. In order to avoid confusion as to whether a non-statutory clearance route was available, the matter could be put beyond doubt by providing a statutory route.

[End of updated extract from ATT’s response of 2 February 2016]


[1] HMRC’s consultation document is at:

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483547/Company_distributions_-_consultation_document__7029_.pdf

[1] This Association’s response of 2 February 2016 to that consultation is at:

[1] https://www.att.org.uk/technical/submissions/company-distributions-att-comments

[1] HMRC published a Summary of Responses on 24 March 2016. It is at:

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/510263/Company_distributions_-_summary_of_responses.pdf

[1]

[1]

[2] This refers to a meeting between professional body and HMRC representatives on 26 January 2016. Since then, the HMRC Summary of Responses (referenced in footnote 1) has included the following statement:

[2] "3.6 The government acknowledges the requests for a clearance procedure for the TAAR from several respondents, but does not believe this is appropriate in these circumstances because clearance procedures are not generally provided for this type of anti-avoidance rule. However, HMRC will provide guidance to demonstrate how this rule will be applied in practice, as requested by the many respondents."

[2]

[3] This suggestion by the ATT was acknowledged in paragraph 2.40 of HMRC’s Summary of Responses.

 

Prepared 4th July 2016