HMRC to reform rules on winding-up companies - ACT NOW before 5 April 2016

HMRC to reform rules on winding-up companies, so you must act now!

Reform to company distributions

If you’re thinking of legitimately winding down a solvent company you should act before 5 April 2016 when new rules, currently at consultation stage, will change how dividends and other company distributions are taxed for individuals.

Why the change?

The target of the reform is to deter businesses owners who structure their financial affairs in order to pay less tax.

HMRC to reform rules on winding up companies

Changing behaviour

The reform, the closing of a loophole some would say, introduces two measures that have the potential to affect the following:

  • Transactions concerning the sale of shares
  • Repayment of share capital
  • A company purchasing its own shares
  • Distributions in a winding up

Why you should ACT NOW before 5 April 2016

Distributions in a winding up of a solvent company after 5 April 2016 will be treated as an income distribution rather than a liquidation meaning that payouts will be taxed as income (under the new rates for dividends and company distribution) rather than capital (at 10% if eligible for Entrepreneurs’ relief).

This will affect:

  • An individual who receives a distribution from the winding up of a close company in respect of shares held;
  • If within two years the individual continues to be involved in a similar trade or activity;
  • Or if the main purpose of these arrangements is to gain a tax advantage;

Act now!

This means that after 5 April 2016, not only will HMRC scrutinise the commercial purpose for winding-up a company but also will have the authority to treat all receipts as income subject to income tax rates, rather than capital receipts subject to capital gains tax. New rules to prevent "phoenixing" of companies (winding up one company and continuing the business in another), in order to gain a tax advantage, are set to take this practice off the agenda.

However, if you legitimately intend closing down a solvent company there is still time to do so under the existing rules, but you should contact your account manager as soon as possible so that capital distributions are made before the 5 April 2016 deadline.

What will DNS do?

Of course, in this respect and in every way DNS will continue to look down all the avenues to find ways to lower you tax bill compliantly and we will keep you updated about all changes to legislation and rules that impact income. Forewarned is forearmed as they say, so call your account manager today to discuss this, or any other tax, business or financial matter, further.

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