Some recent news about how HM Revenue and Customs (HMRC) views an accounting practice caught our eye this week – primarily because it involves profitable companies and their closure.

Which is intriguing because a lot of the insolvency news regards unprofitable businesses and how they close down. 

HMRC are looking into “moneyboxing” and the implications for directors and their tax positions especially if a business is closing through a members voluntary liquidation (MVL) process. 

What is moneyboxing?

Moneyboxing, in this instance, refers to a business practice of holding profits within a company’s books, for the purpose of gaining a tax advantage on the eventual closure of the business. 

HMRC have expressed concerns in previous cases about the use of the process, as they see it as aggressive tax planning and inherently unfair to other taxpayers who cannot make the same type of arrangement. 

They will consider the financial position and reasons for closure for a business and look at whether there has been any attempt at “moneyboxing”. 

If they consider this as being the case then they will apply their safeguarding measures that would see income tax having to be paid on any distributions from a closed company if a shareholder becomes involved in a similar trade or activity within two years of that closure. 

There are no hard and fast rules set out to define what excessive retention of funds is, for instance working capital requirements vary greatly between businesses. Directors erring on the side of caution with working capital may find themselves wrongly accused of trying to gain a tax advantage even though they are running their business how they see fit. 

Chris Horner, insolvency director with BusinessRescueExpert, said: “When dealing with any tax matters it’s important to consult your accountant before making any decisions. They will be able to advise you on what HMRC are looking for and how to meet their requirements.

What any accountant worth their salt will also tell you is that if your business is profitable or can pay off its debts within a 12 month period then a members’ voluntary liquidation (MVL) is definitely worth considering. 

“There are several other costs and factors but one example of how beneficial it could be is that an MVL allows shareholders to treat the final distributions of the business as capital distributions rather than profits. 

“Higher rate taxpayers would usually see business profits taxed at 40% to 45% but with an MVL, directors could be entitled to business asset disposal relief (BADR) – the previous name for entrepreneurs’ relief – which would see the same assets taxed at a lower rate of 10%. 

Suitability for an MVL

Not every business would be able to choose or would benefit from an MVL. It all depends on their unique situation and financial position. 

There are five main criteria to consider when deciding if an MVL could be an appropriate way to close a business. These are:-

  • Has the company stopped trading already – or is about to?
  • Did it carry out trading activities?
  • Have directors owned shares in the business for at least 12 months?
  • Is it debt free or can it repay all outstanding debts within 12 months?
  • Does it have at least £25,000 worth of assets to distribute to shareholders after closure?

Before any decisions are taken, there are two calls a director or business owner considering how to handle closing a profitable company should make. 

The first is to their accountant and the second is ourselves to arrange a free initial consultation with one of our team of advisors. 

They will be able to appraise you of all your options including some you may not have considered or thought you might have been eligible to apply. 

But you won’t know what courses of action are open to you until you get in touch first.