G17. Liquidation

INCOME TAX

Transactions in securities

- Distribution in a winding up is a transaction in securities

- See ITA 2007, s.684.

- Query whether HMRC might seek to apply the code if the company has been retaining profits in excess of its commercial needs.

- Ebsworth v. HMRC - T and spouse owned a company but wanted to separate. Newco (owned solely by T as a result of spouse transferring shares to him) purchased the business of the old company, which was then liquidated. HMRC accepted capital treatment for spouse but not T. Held: no income tax advantage or if there was, it was no in consequence of the transfer of shares in Newco.

Legislation:

Cases: Ebsworth v. HMRC [2009] UKFTT 199 (TC);

HMRC manuals:

Commentary: TCCR, W6.2.12;

Matching gains to benefits (s.87 + s.89(2) + Sch 4C)

- Distribution in a winding up as a capital payment for the purposes of matching

General position

- Query whether a distribution by a company to a shareholder can be a capital payment for the purpose of matching gains.

- Capital payment includes a payment, transfer of assets "and the conferring of any other benefit" (s.97(2)).

- Arguably not a benefit:

- Shareholders have a right to receive dividends, if declared (Laird Group plc §36).

- Distribution in a winding up is a payment that "merely gives effect to the shareholders' rights; they receive only what is already theirs" (Laird Group §37).

- But it does seem to be a payment or transfer of assets.

- Perhaps it is a transaction at arm's length (s.97(1)(b)).

- HMRC accept that this can apply to connected party transactions.

Exclusion for income

- For UK residents, a payment is excluded if it is chargeable to income tax (s.97(1)).

- No exclusion if it is chargeable to corporation tax.

- UK resident companies can be taxed on s.87 gains.

- For non-residents, a payment is excluded if it is received as income.

- Payment in winding up normally not income/chargeable to income tax (albeit see the phoenixing TAAR).

Value of the capital payment

- The amount of a capital payment which is an 'outright payment of money' appears, implicitly, to be the amount of the payment (s.97(4)).

Consequences

- If a distribution in a winding up is/can be a capital payment

- If the distributing company is controlled by a trust, the shareholder might be treated as receiving the payment from the trust, to allow matching.

- If the recipient is a UK resident company, it may be taxed on matched gains.

- If the recipient is a non-UK resident company, the capital payment may be treated as received by its own participators.

- See detailed notes on matching in i9. Benefits provided by trust.

Company makes capital payment to trust which 100% owns company (generally ignore)

- HMRC say: "In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of TCGA 1992 Sch 5 para 9(3) and are not treated as capital payments within TCGA 1992 s 97." (SP5/92, §18)).

- Query what the position is if the trust owns 99% of the company, and why - Kessler suggests capital payment to the extent of trust non-ownership, at least in some cases.

Legislation: TCGA 1992, s.96, s.97.

Cases:

Laird Group plc v. IRC [2003] UKHL 54;