HMRC Policy Change Regarding Members Voluntary Liquidation
What are the tax benefits of an MVL?
Where the board is looking to place the company into solvent liquidation to improve the tax position for shareholders on closure, the general benefit is that the distribution is classified as capital as opposed to income. In addition, there is the option to claim entrepreneurs relief which further reduces the tax liability. To benefit, the company should meet the following criteria:
- In excess of £25,000 distributable to members
- Shareholders are individuals rather than companies
Further information on entrepreneur’s relief in members voluntary liquidation can be found here.
What has changed?
Previously on members voluntary liquidation matters, HM Revenue & Customs adopted the position that interest was only payable on corporation tax debts from the date they fall due. The rate of 3% being the late payment fees.
Following the Lehman Brothers case, HM Revenue & Customs’ policy is now that statutory interest (at the rate of 8%) from the date of liquidation. This applies even if the corporation tax debt has not yet fallen due. The reason for this is that in the Lehman Brothers case, the court determined that statutory interest is payable on future and contingent debts, from the date of administration or liquidation.
This is further defined in the Insolvency (England and Wales) Rules 2016 under rule 14.23. This states that interest is payable from the relevant date (the commencement of proceedings), where a debt is proved in insolvency proceedings. It may be arguable that being that members voluntary liquidation is a solvent liquidation it should technically not be labeled as insolvency proceedings. However, HM Revenue & Customs are unlikely to change their policy without being challenged by the court.
How should I deal with the changes?
The result of the changes is, effectively, an additional tax on monies in members voluntary liquidations. Where there are significant assets which must first be sold in the liquidation, it may be some time before creditors can be paid. This could result in additional statutory interest. When there is only a cash distribution to be dealt with, there is still a dividend process to comply. This means that 1 – 3 months of statutory interest will still be payable to HM Revenue & Customs, even if paid at the earliest opportunity.
These tax debts should be taken into account when reviewing as to whether a members voluntary liquidation is the best course of action, in relation to the overall distribution to shareholders. While the policy only specifies corporation tax, it is safe to assume HM Revenue & Customs will seek to claim statutory interest from the date of liquidation on all types of tax.
One way to avoid paying the statutory interest may be to pay off the tax debts based on the amount due, according to their online system and figures prepared by your accountant before entering liquidation. If the figures are less certain, it may be prudent to overpay the tax debts and allow the insolvency practitioner to reclaim in balances to distribute in the liquidation. This may result in less cash in the short term. However, it would achieve a greater return to shareholders in the long run.
Can we expect other policy changes?
With the changes last year largely affecting contractors, reclassifying capital distributions as income in certain circumstances, it is likely we can expect further scrutiny on the tax benefit of members voluntary liquidations.
A potential future policy change relates to directors loan accounts, which are distributed in specie, as opposed to being repaid prior to liquidation and paid as a cash distribution. HM Revenue & Customs are currently running a case seeking to reclassify the capital distribution of the loan as income, being that it was paid prior to liquidation.
It is currently unknown whether this is a standalone case due to the circumstances, a mistake on the part of HM Revenue & Customs or a test case which may result in a change in policy. However, it is consistent with the Finance Bill 2017 which passed its second reading in parliament on 12 September 2017. This seeks to apply a tax charge on interest free loans, which may be income and are not repaid by 5 April 2019.
In any event, it is important to seek advice from your accountant in relation to tax matters before undertaking a members voluntary liquidation, alongside one of our business rescue experts.