Successful entrepreneurs often move from one business project to another.
If you are about to start up a new business having closed down an old one, be careful not to fall into the phoenix trap. This is when one company is liquidated, so the cash accumulated in the company is distributed to the shareholders and subject to capital gains tax. Then the same owner starts a new business running a very similar trade, only to close that after a few years and phoenix again.
The targeted anti-avoidance rule (TAAR) can ruin this strategy as the accumulated cash distributed on liquidation is taxed as income rather than as again.
The TAAR applies when the person who receives the distribution starts up a similar trade or activity (not necessarily in a company) within two years of the liquidation. It must also be reasonable to assume that the main purpose, or one of the main purposes, behind winding-up the company was to reduce the owner’s income tax liability.
HMRC can argue that the TAAR may also apply when the original company is sold rather than liquidated by the owners.
There will be a range of circumstances between selling the company with no intention to work in the area again and disposing of the assets and trade of the company than selling the cash-rich shell to a third party to liquidate. In the latter case, HMRC may invoke the general anti-abuse rule (GAAR) to counter the perceived tax avoidance.
If you are planning to sell your company and start another, please talk to us first so that we can steer you out of the phoenix trap
