Taxpayers completing self-assessment tax returns need to consider the impact of new rules if they have received a distribution on winding up their company on or after 6 april 2016 and continue to be involved in similar activities, warns the Association of Taxation Technicians (ATT).

New legislation prevents individuals lowering their tax liability by converting what might otherwise be received as a dividend into a capital payment by winding up their company.

The new rules apply, broadly, where an individual who winds up their company continues to carry on, or be involved with, the same or similar trade at some point in the next two years and the main purpose, or one of the main purposes, is to reduce their income tax bill. Where this is the case any distribution on winding up will be subject to income tax, and not the lower rates of capital gains tax which normally apply.

These new rules were originally proposed to tackle tax advantages arising from "phoenixing", the practice of liquidating a company and then setting up a new company to carry on much the same activities. However, the scope of the legislation goes beyond this and has the potential to apply in a much wider range of situations.

Tax returns for the tax year ended 5 April 2017 are the first when the new rules can apply. The ATT is urging potentially affected taxpayers and their agents to consider providing additional detail in the white space of the self-assessment return as this may provide some protection from penalties for errors in returns. This extra information could include, for example, information on the background to the winding up and why they believe the rules do not apply.

Yvette Nunn, co-chair of ATT's technical steering group, said:

"As these new rules are self-assessed, taxpayers have to decide whether they apply. They must therefore be considered in any situation where a taxpayer has wound up their company since 6 April 2016 and continues to be involved in similar activities. "Deciding whether the rules apply is complicated by the subjective nature of the conditions, the lack of any clearance facility and the limited practical examples in HMRC's guidance.

"It is unclear whether if a taxpayer genuinely believes that they do not apply, but if HMRC concludes they do, penalties will be imposed.

"We have written to HMRC asking for further guidance on the application of the rules, including how HMRC will apply penalties if they consider an error has been made in a tax return.5 If there is any doubt as to whether these rules may apply, taxpayers and their agents should consider providing additional detail in the white space of the self-assessment return as this may provide some protection from penalties."