Updated: 13th July 2026
Taking money out of a company must be done correctly to avoid unexpected tax consequences. Whether you’re extracting profits from a trading business or closing a solvent company through a Members’ Voluntary Liquidation (MVL), understanding the relevant tax legislation is essential.
One of the most important rules Company Directors should be aware of is the Targeted Anti-Avoidance Rule (TAAR). Introduced under the Finance Act 2016, TAAR was designed to prevent individuals from gaining an unfair tax advantage by winding up one company, extracting profits at lower Capital Gains Tax rates, and then continuing the same or a similar business through a new company.
Despite its reputation, TAAR does not apply to every company liquidation. In fact, thousands of legitimate MVLs are completed every year without issue. The legislation applies only where specific conditions are met, and obtaining a tax advantage is one of the main purposes of the liquidation.
In this guide, we’ll explain:
- What the Targeted Anti-Avoidance Rule is
- Why HMRC introduced TAAR
- The four conditions that must be met
- How TAAR affects Members’ Voluntary Liquidations
- What phoenixing means
- How Company Directors can remain compliant.
What is the Targeted Anti-Avoidance Rule (TAAR)?
The Targeted Anti-Avoidance Rule (TAAR) is legislation introduced as part of the Finance Act 2016 to tackle tax avoidance involving company distributions.
Its primary purpose is to prevent Company Directors and shareholders from extracting company profits as capital distributions when those profits should instead be treated as income.
This distinction matters because capital distributions made during a solvent liquidation are generally taxed under Capital Gains Tax rules, which can be significantly more favourable than Income Tax rates that apply to dividends.
TAAR allows HM Revenue & Customs (HMRC) to reclassify certain capital distributions as income where it believes the arrangement has been used primarily to obtain a tax advantage.
While the legislation was introduced to tackle abusive “phoenix” arrangements, its scope can extend beyond obvious cases of phoenixing if the legal conditions are satisfied.
Why was TAAR introduced?
Before TAAR was introduced, some Company Directors were able to close profitable companies through a Members’ Voluntary Liquidation, receive the retained profits as capital distributions, and then immediately start trading again through a new company carrying out virtually identical activities.
Because capital distributions are generally taxed differently from dividend income, this approach could significantly reduce the amount of tax paid.
HMRC viewed these arrangements as exploiting a loophole in the tax system. The Finance Act 2016 introduced TAAR to ensure that business owners could not repeatedly liquidate companies simply to benefit from lower Capital Gains Tax rates while continuing substantially the same business.
The legislation aims to distinguish between:
- Genuine commercial business closures
- Artificial arrangements designed primarily to avoid Income Tax.
This helps ensure companies pay the correct amount of tax while allowing legitimate business restructures and retirements to continue.
How does TAAR work?
TAAR focuses on the tax treatment of distributions made when a company is wound up.
Normally, when a company enters a Members’ Voluntary Liquidation (MVL), any remaining profits are distributed to shareholders as capital. These payments are generally subject to Capital Gains Tax rather than Income Tax.
For many Company Directors, this can be an entirely legitimate and tax-efficient way to close a solvent business.
However, if HMRC believes the liquidation was primarily carried out to obtain a tax advantage before continuing the same or a similar trade, it may apply TAAR.
If this happens, the capital distribution may instead be treated as dividend income, resulting in a significantly higher tax liability.
When does TAAR apply?
TAAR only applies where all four statutory conditions are satisfied.
1. The shareholder owns at least 5% of the company
The individual receiving the distribution must hold at least a 5% interest in the company being wound up.
This usually applies to owner-managed businesses where Directors are also shareholders.
2. The company is a close company
The company must have been a close company at some point during the two years before liquidation.
Most privately owned limited companies fall into this category.
3. The shareholder continues a similar trade
Within two years of receiving the distribution, the individual must become involved in carrying on the same or a similar trade or activity.
This could involve:
- Forming a new limited company
- Becoming a shareholder in another similar company
- Becoming involved in an existing business carrying out substantially similar work
Importantly, you do not necessarily need to create the new company yourself for this condition to apply.
4. Obtaining a tax advantage is one of the main purposes
Finally, HMRC must believe that obtaining a tax advantage was one of the main purposes behind the liquidation.
Simply paying less tax through legitimate planning is not automatically enough. HMRC will consider the commercial reasons behind the liquidation and whether there was a genuine business purpose for closing the company.
Only when all four conditions are met can TAAR be applied.
What is a close company?
Many Directors are unfamiliar with the term close company, despite it being central to TAAR.
A close company is broadly defined as a company that is controlled by:
- Five or fewer shareholders, or
- Any number of Directors who are also shareholders.
Because many small and medium-sized businesses are owner-managed, the majority of private limited companies are classified as close companies for tax purposes.
Being a close company is perfectly normal and does not mean HMRC considers the business to be high risk. It is simply one of the conditions used when determining whether TAAR applies.
What is phoenixing?
Phoenixing occurs when a business effectively rises from the ashes of another.
In legitimate circumstances, this may happen when a business has failed financially, but its owners wish to start again under a new company. Genuine business rescue is not automatically prohibited.
However, abusive phoenixing usually involves:
- Closing a profitable company
- Receiving profits as capital distributions
- Immediately starting a nearly identical business
- Continuing to serve the same customers using the same assets or trading model.
This allows the owners to continue trading while paying less tax on profits extracted from the previous company.
It is these arrangements that TAAR was primarily designed to prevent.
Does TAAR apply to Members’ Voluntary Liquidations (MVLs)?
One of the biggest misconceptions surrounding TAAR is that it makes Members’ Voluntary Liquidations risky.
In reality, this is not the case.
An MVL remains one of the most tax-efficient and widely used methods of closing a solvent company. Thousands of Directors use MVLs every year when:
- Retiring
- Selling a business
- Restructuring their affairs
- Moving into employment
- Ending a business that is no longer required
Provided there is a genuine commercial reason for winding up the company, and the TAAR conditions are not met, HMRC is unlikely to challenge the distribution.
Professional advice before entering an MVL can help ensure the liquidation is structured correctly and fully complies with current legislation.
Related: Members’ Voluntary Liquidation Tax Benefits
Does TAAR apply to Creditors’ Voluntary Liquidations (CVLs)?
TAAR is generally associated with solvent liquidations rather than insolvent ones.
A Creditors’ Voluntary Liquidation (CVL) usually involves an insolvent company that has insufficient assets to pay its debts.
Because there are often no significant profits available for shareholders to extract, TAAR is far less likely to be relevant.
Instead, HMRC’s focus in a CVL is typically on Director conduct, creditor treatment, and compliance with insolvency legislation.
What happens if HMRC investigates?
If HMRC believes TAAR may apply, it can investigate the circumstances surrounding the liquidation.
During its review, HMRC may examine:
- The reasons for winding up the company
- Whether a similar business was started afterwards
- The timing of any new trading activity
- The commercial rationale for the liquidation
- The tax position of the shareholders.
If HMRC concludes that TAAR applies, it may:
- Reclassify capital distributions as income
- Charge additional Income Tax
- Apply interest on unpaid tax
- Impose financial penalties where appropriate.
Every case is assessed individually based on the available evidence.
How can Company Directors avoid breaching TAAR?
Fortunately, avoiding problems under TAAR is relatively straightforward for Directors acting in good faith.
Before winding up your company, consider:
- Seeking professional insolvency and tax advice.
- Ensuring there is a genuine commercial reason for liquidation.
- Carefully documenting the reasons behind your decision.
- Thinking carefully before becoming involved in a similar business within the following two years.
- Understanding the tax implications before extracting company profits.
Obtaining professional guidance before proceeding with an MVL can provide reassurance that the liquidation is being carried out correctly and help reduce the risk of future disputes with HMRC.
Related: The Impact of Insolvency on Directors: What You Need to Know
Common misconceptions about TAAR
There are several myths surrounding the Targeted Anti-Avoidance Rule.
“Every Members’ Voluntary Liquidation is caught by TAAR.”
No. Most MVLs are entirely legitimate and proceed without issue.
“You can never start another company after an MVL.”
Incorrect. Starting another business does not automatically trigger TAAR. HMRC considers the full circumstances before deciding whether the legislation applies.
“HMRC investigates every company liquidation.”
No. HMRC focuses on cases where there is evidence that the statutory conditions may have been met.
“Tax-efficient planning is always tax avoidance.”
Not at all. Legitimate tax planning remains perfectly acceptable provided it complies with current legislation.
Why choose Clarke Bell?
Since 1994, Clarke Bell has helped thousands of Company Directors navigate solvent liquidations, business restructuring, and insolvency procedures with confidence.
Whether you’re considering a Members’ Voluntary Liquidation, planning your retirement, or simply want to understand how TAAR could affect your business, our experienced Insolvency Practitioners can provide clear, practical advice tailored to your circumstances.
We’ll help you understand your options, ensure compliance with HMRC regulations, and guide you through every stage of the liquidation process.
Contact Clarke Bell today for a free, confidential consultation with one of our experienced advisers.
Frequently Asked Questions
Is TAAR tax avoidance or tax evasion?
No. TAAR is not a form of tax avoidance or tax evasion itself. It is legislation introduced by HMRC to prevent certain tax avoidance arrangements involving company liquidations. Tax avoidance involves reducing tax through legal means, while tax evasion involves deliberately breaking the law by failing to pay tax owed.
Does TAAR apply if I retire after closing my company?
In many cases, no. If you are genuinely retiring and have no intention of carrying on the same or a similar trade within two years, TAAR is unlikely to apply. HMRC will consider your circumstances and the commercial reasons for winding up the company.
Does TAAR apply if I work for another company?
Simply becoming an employee of another business will not automatically trigger TAAR. The legislation is primarily concerned with shareholders who continue carrying on the same or a similar trade after receiving a capital distribution. Every case depends on its specific facts.
Can TAAR apply if I become a consultant?
Potentially. If you begin providing substantially the same services as you did through your previous company, HMRC may consider whether you are continuing the same trade. Whether TAAR applies will depend on all four statutory conditions being met, including whether obtaining a tax advantage was one of the main purposes of the liquidation.
How far back can HMRC investigate a company liquidation?
HMRC has powers to investigate company tax affairs where it believes tax may have been underpaid. The length of time it can look back depends on the circumstances of each case and whether any errors were considered careless or deliberate. Seeking professional advice before entering liquidation can help minimise the risk of future enquiries.
Is professional advice recommended before an MVL?
Yes. Every company’s circumstances are different, and taking advice from a licensed Insolvency Practitioner before entering a Members’ Voluntary Liquidation can help ensure the process is carried out correctly, that any available tax reliefs are claimed appropriately, and that you remain compliant with HMRC legislation.
Can Clarke Bell help me decide if an MVL is the right option?
Yes. Clarke Bell’s experienced Insolvency Practitioners can assess your company’s financial position, explain the available options, and advise whether a Members’ Voluntary Liquidation is the most appropriate solution for your circumstances. They can also help you understand any potential tax implications, including whether TAAR is likely to be relevant.
