The winding-up TAAR (Targeted Anti-Avoidance Rule, ITTOIA 2005 s.396B) is the rule that can turn a capital distribution from a Members' Voluntary Liquidation back into a taxable income dividend. It exists to stop the "phoenix" pattern, where a contractor liquidates a PSC to take the reserves as capital (at BADR rates) and then restarts essentially the same business.
The TAAR applies only where all four conditions are met:
- Condition A: the individual held at least 5% of the company immediately before the winding up.
- Condition B: the company was a close company at some point in the 2 years to the winding up.
- Condition C: within 2 years of the distribution the individual continues, or is involved in, the same or a similar trade or activity.
- Condition D: it is reasonable to assume a main purpose of the winding up was to avoid or reduce income tax.
Condition C, combined with the main-purpose test in Condition D, is the one that catches contractors who liquidate and then keep contracting in the same field. Where the TAAR bites, the distribution is taxed as an income dividend (up to 39.35% in 2026/27) and BADR is irrelevant. The TAAR should always be checked before recommending an MVL for a contractor who intends to keep working in the field. HMRC guidance is at CTM36305.