On 25 July 2018, HMRC updated its Company Taxation Manual in relation to the application of the “main purpose” test (Condition D) in the targeted anti-avoidance rule (TAAR) that taxes as income, rather than capital gain, distributions made to an individual in the course of a winding up of a close company if that individual continues, in one of three ways, to have involvement in the company’s trade (or a similar trade) after the winding up.

The updated Manual confirms that:

• a decision not to make an income distribution prior to the company’s winding up does not, of itself, mean that Condition D is met

• if the recipient of the distribution is confident there will be enough supporting evidence for an officer to arrive at a sound conclusion that Condition D was not met, that individual should self-assess on that basis and HMRC can only displace that where the individual’s decision is not reasonable. The revised guidance also confirms that although the main purpose test is applied by reference to intentions at the time of the decision to wind up the company, this will be evidenced by what happens after the winding up occurs

• it is less likely that Condition D will be met where the individual remains involved with the carrying on of the trade (or similar) as an employee (rather than as an owner, shareholder or partner) and has no involvement with, or influence over, the direction or decision-making of the entity carrying on the activities.

HMRC has also amended its examples that illustrate one of the three types of ongoing involvement in the trade required for the TAAR to apply, emphasising that the involvement has to be “with the carrying on of” the trade (similar language has been added to CTM36340).

A copy of HMRC’s Company Taxation Manual can be viewed here