On 24 March 2016 the UK published a summary of responses to the consultation on company distributions.

This consultation followed the announcement by the government in the summer budget of 2015 that the taxation of dividend income would be reformed and simplified. This was intended to deal with the issue of individuals being incentivized to incorporate, work through a company and pay less tax by taking income as dividends rather than salary or self-employment income. This could become attractive because income could then be taxed at the capital gains tax rates that are lower than the new dividend tax rates. It should be noted also that the rates of capital gains tax have been decreased further in the 2016 budget announcements.

The consultation document entitled “Company Distributions” was published on 9 December 2015 in an effort to obtain views on aspects of the distributions rules and the draft legislation. The draft legislation contained amendments to prevent unfair tax advantages in some circumstances and to introduce a new Targeted Anti Avoidance Rule (TAAR) to prevent some distributions in a winding up being taxed as capital where certain conditions are met and there is an intention to gain a tax advantage. The document sought views on the possibility of a wider review of the distributions rules.

The consultation document looked at four ways in which a shareholder can receive value from a company in a form that is subject to the capital gains tax rules rather than income tax. These four ways are a disposal of shares to a third party; a distribution made in a winding up; a repayment of share capital; or a valid purchase of own shares by an unquoted company.

Generally the respondents considered the TAAR would help to deal with the issue whereby a person uses a winding up process to convert income to capital while continuing to operate the same or a similar trade. The definition of a similar trade would however require clarification. There was considered to be a danger that the TAAR could apply in circumstances that did not amount to avoidance.

Some respondents were concerned that the changes would inhibit commercial activities and disproportionately affect family businesses and there were concerns about the additional procedural burdens and extra time and costs. Some respondents suggested a clearance procedure for the TAAR and for the changes in the Transactions in Securities rules but the UK government has decided not to go ahead with a clearance procedure.

UK government response

The UK government is to continue its plans to amend the Transactions in Securities rules and to introduce a new TAAR, but the draft legislation will be amended in response to issues raised in the consultation.

The legislation is to be amended so it will not apply to minority shareholders. Also the definition of arrangements is to be clarified; distributions are not to be treated as income to the extent that they represent the capital gains base cost; and the exemption for distributions of irredeemable shares is to be broadened so the TAAR will not apply to standard “liquidation demergers”. Additional clarity will be provided in how the rules apply to partnerships or to holding companies.

Revised legislation is included in the Finance Bill 2016 and is to come into effect from 6 April 2016. Guidance is to be provided on how the TAAR will be applied in practice. The government does not have any plans for a wider review of the distributions legislation.