Removing barriers to de-enveloping residential property - joint submission

6 Jul 2017

Clause 35 introduces a new targeted anti-avoidance rule (TAAR) for certain distributions made on a winding up. According to HMRC, the TAAR is being introduced to tackle a small number of taxpayers who are exploiting the current rules in limited specific circumstances. However, in our view the legislation encompasses a very wide range of commercial situations where tax avoidance is not involved. Our concern is that the TAAR will lead to complexity in the tax code and commercial uncertainty for all taxpayers.

Moreover, despite representations from stakeholders including ourselves, there is no formal clearance procedure in the clause itself. The continuing lack of such a procedure means that it will have to be self-assessed by the taxpayer. We think that taxpayers will find it difficult to know whether a transaction will fall foul of the TAAR or not, so, in order that commercial decisions and transactions are not impeded, it will be crucial that enough information is made publically available by HMRC so taxpayers can understand how HMRC will interpret the conditions in new ITTOIA 2005 sections 396B and 404A.

It seems that we are likely to end up in the position of HMRC guidance being key in ascertaining the scope of the TAAR. The CIOT‚ s consistent view has been that ‚ taxed by legislation, untaxed by guidance‚ is an unsatisfactory feature in the UK tax system.

HMRC have said that they intend to publish their guidance using a number of examples to demonstrate the type of transactions to which they consider the new TAAR should and should not apply. We have requested that this guidance is published as soon as possible, in draft if necessary, in order to minimise the uncertainty that the legislation has created.

In our letter to HMRC, we have set out a number of examples which we think are suitable for guidance and on which HMRC‚ s view is needed.

We would like to thank those members who contributed examples. Most of the examples seek to clarify HMRC‚ s view of circumstances where Condition C in new sections 396B and 404A is met. Condition C is very widely drafted, and we have evidence that it is already creating uncertainty and therefore potentially affecting commercial decisions.

In our letter we also asked for clarification on a number of other issues.

New Section 396B(4) ‚ what does ‚ the same or similar trade or activity‚ mean? For example, If one company sold vehicle parts and another company undertook vehicle repairs would these be similar activities? If a property investment business consisted of investing in commercial property and another invested in residential property, would these be similar businesses? New Section 396B (4)(d) ‚ what does ‚ involved‚ mean? On its own it is particularly vague and potentially wide-reaching. For example, can someone be regarded as ‚ involved with the carrying on of such a trade or activity by a person connected with the individual‚ if, instead of working in the business, they provide loan finance for that business or act as a mentor? New Section 396B (1) ‚ meaning of ‚ individual‚ . Does ‚ individual‚ include the beneficiary of a trust? Transaction in Securities: company distributions ‚ interaction. All of the transactions that the TAAR considers are theoretically caught by the transactions in securities rules too, now that a transaction in securities includes a distribution in respect of securities on a winding up (as introduced by Finance Bill 2016 clause 33). We have asked HMRC for clarity on (1) when they would accept that the TAAR does not apply but might consider counteraction under the transactions in securities rules instead; (2) whether HMRC would ever seek to apply the TAAR in circumstances where transactions in securities clearance has been granted on disclosure of full facts; and (3) whether HMRC will be putting the resources in place to deal with a likely increase in clearance applications under the transactions in securities rules. Clearances for schemes of reconstruction ‚ interaction. We have also written to HMRC to ask whether HMRC would consider including an additional exclusion in new section 396B(7) and 404A(7) for transactions for which clearance has already been given under section 139(5) or, indeed, for schemes of reconstruction more generally.

Technical Team