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    Insolvency Practitioners

    Insolvency Practitioners and Members Voluntary Liquidations Tax

    Advice from our Insolvency Practitioners on the New Policy for Tax and Members Voluntary Liquidations

    In this latest Cautionary Corner article, Matt Hardy, partner and one of our insolvency practitioners here at our central Birmingham HQ takes a look at HM Revenue and Customs’ (rather quiet) announcement of a change in policy when dealing with corporation tax payments in Members Voluntary Liquidations (“MVLs”).  This article looks at what the change is, what it tries to do (essentially extract more tax out of MVLs), and what directors can do to mitigate it.

    Members Voluntary Liquidations? Remind me?

    MVLs are solvent liquidations usually recommended by accountants and tax advisors (and managed/supervised by Liquidators, who are normally Licensed Insolvency Practitioners) to clients as a tax effective mechanism to withdraw accumulated profits from a limited company, if that company has stopped trading and is no longer required. 

    In the SME arena, this is usually because the business owners are retiring or because the business has been sold by the limited company.  It can also apply for businesses set up for a specific project that has completed and the profits and accumulated reserves need to be extracted from the company by its shareholders.

    MVLs have long been seen as a tax efficient means of withdrawing accumulated profits and redistributing them to shareholders. HMRC had already taken steps 12 months ago to curtail some of the tax advantages of using MVLs.  You can read our article from March 2016 here which dealt with restrictions just before they were introduced by the Finance Bill 2016.

    Importantly, recent case law has provided HMRC with another opportunity to squeeze a bit more tax out of entrepreneurial business owners who are looking at MVLs. Unless of course you plan ahead, which is where our Insolvency Practitioners can help.

    What has been happening up until now?

    Up until recently, it has been HMRC policy to use the normal due date for the payment of corporation tax, even if the MVL commences before the due date.  For example:

    So What Is this Change in Policy?

    HMRC are now claiming statutory interest at 8% per annum which starts to run from the date of liquidation, even if the normal due date for corporation tax hasn’t yet passed. That’s quite an increase.

    HMRC are relying on some principles arising out of one of the Lehman Brothers Court cases which has decided that statutory interest applies to debts payable at a future date.  Whilst Lehman Brothers was of course a completely different procedure, HMRC are relying on a similarity in legislation wording that applies to liquidations and debts payable at a future date.

    And it’s not just corporation tax – the same principle would apply to all taxes payable at a future date such as VAT and PAYE. 

    You mentioned Planning ahead?

    The problem is that some tax debts only crystallise at the date of liquidation and you may not know the exact liability. Indeed, HMRC can’t accept a tax return or a VAT return until the MVL commences and they have been notified of the end of an accounting period.

    If statutory interest is to be avoided, then our recommendations, as insolvency practitioners with experience of many MVLs, are that you plan ahead for the liquidation and where possible take the following steps:

    How are we responding at Poppleton and Appleby, Birmingham?

    On our existing MVL cases where this is happening, we are pushing back and asking HMRC for a discount on the amounts of tax settled early using some very specific provisions in the legislation for liquidations.  As yet, we have not received a reply but it is hoped that by settling tax bills early, there may be an entitlement to a discount on the sums due to HMRC.

    Each case will of course be different and it may be that due to the nature of the assets to be dealt with in an MVL (for example, a property needs to be sold), it may not be possible to pay the taxes due before the MVL commences.  We’d be happy to meet with you, here at our Birmingham offices, or wherever is convenient, to discuss the logistics of the proposed MVL in plenty of time to discuss how these new tax issues might be dealt with.

    Are HMRC Looking at any other changes for MVLs ?

    We don’t know for sure, but it is clear that, with the Entrepreneurs Relief changes introduced in April 2016 and these recent policy changes, HMRC are tightening up on the tax benefits available to shareholders in MVL’s  and the tax extracted from companies entering the process.

    Overdrawn Director Loan Accounts are Under Scrutiny

    We are aware of another issue that is under scrutiny at the moment where HMRC are looking to challenge overdrawn director loan accounts that accrue prior to the MVL starting, but are then distributed in specie after the MVL is in place (rather than being physically repaid).  This seems to centre on an attempt to classify the capital distribution as income on the basis the funds were advanced prior to the date of liquidation. 

    At the moment it is a test case and we are watching to see the outcome, but tax charges do seem to be on the horizon for loan accounts not repaid by April 2019 with the introduction of the Finance Bill 2017.

    Contact Our Insolvency Practitioners for Help and Advice

    Planning for an MVL is of course a matter for the accountants and tax advisors. However as Insolvency Practitioners who regularly manage and supervise these liquidations, we would be very happy to be part of the planning and consultation process.  Please feel free to contact us or call us on 0121 200 2962 to discuss any of these issues.

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