What is a ‘Phoenix company’?
Capital Gains Tax taper relief disappeared from 6 April 2008. However, it is being replaced by Entrepreneur’s Relief in Finance Act 2008. ‘Phoenix’ companies therefore look set to continue.
These are broadly companies which are set up to trade for a limited time period (commonly just over two years, under the taper relief regime), before being wound up. The trader would then re-commence the same or a similar business through a new company, and repeat the cycle. However, it seems that HMRC have recently become more alert to phoenix companies.
Part of this process commonly involves an application being made to HMRC under Extra Statutory Concession C16 for distributions to shareholders during an informal winding up of the company to be treated like capital payments under a formal liquidation, rather than dividends liable to income tax. Certain assurances must be given as part of the application process, before HMRC will agree to apply ESC C16, which are set out in the concession itself.
In Taxline (March 2008), David Whiscombe pointed out: “However we are finding that before sanctioning ESC C16, HMRC are now routinely seeking two additional undertakings not set out in the concession. These are to the effect that:
- the company will not transfer or sell its assets or business to another company having some or all of the same shareholders; and
- the arrangement is not a reconstruction in which some or all of the shareholders in the original company retain an interest in the second company.”
The first of these additional conditions suggests that HMRC will refuse to apply ESC C16 in a ‘phoenix company’ situation. HMRC’s Company Taxation Manual seems to support this treatment. CTM36220 outlines two additional conditions that HMRC will consider before applying ESC C16. One of these is that the company is not the subject of an investigation. The other condition is that:
“The company is not one which, if the distributions were made in a winding up, would be reported to the Anti-Avoidance Group (Intelligence) Clearance and Counteraction Team in respect of Section 703 ICTA 1988 [now ITA 2007, s 684] under sub-paragraphs (e) or (f) of CTM36875.”
CTM36875 paragraph (e) (now point 5) is:
“The transfer or sale by a company of its assets or business to another company having some or all of the same shareholders followed by a liquidation of the company whose assets etc have been acquired…”
The company owner may decide to incur the additional expense of a formal liquidation, rather than risking a refusal by HMRC to apply ESC C16 and drawing attention to the matter. However, there is still the issue of the ‘transactions in securities’ anti-avoidance rules mentioned above. An ‘ordinary’ liquidation (in which a company is wound up following the complete cessation of business or the transfer of business to unconnected business) is outside the scope of ITA 2007, s 684. However, phoenix companies are potentially caught (see CTM 36850).
Care is therefore needed when dealing with owner-managed companies which are wound up, if the business is to be continued in a newly-formed company. A sale of company shares to another company is also at risk under the transactions in securities rules, if the vendor has a substantial interest in that company. A clearance procedure is available (ITA 2007, s 701), which is particularly important in cases of uncertainty.
The above article is taken from the Mark McLaughlin Associates eNewsletter (March/April 2008). To receive future copies by email, contact us.