The tax implications of a Members Voluntary Liquidation
17th November 2017 by Lisa Haste
We deal with many cases of solvent liquidations (MVLs) where a Company is in a position to pay all of its creditors and the Shareholders want to undertake a final orderly winding up of the Company’s affairs and extract their capital.
What is an MVL?
This procedure is often employed where a company may have fulfilled its purpose, or a group restructuring is envisaged or that the Shareholders and Directors are retiring from business and there is no succession plan.
Why use an MVL?
One of the benefits to the shareholders from exiting via an MVL is that generally distributions to shareholders made from a liquidation will be treated as capital distributions and therefore will attract a lower rate of tax than normal dividends which are taxed at income tax rates. Additionally any distribution from an MVL may qualify for Entrepreneurs Relief and therefore be taxed at 10%
There are two main aspects of taxation to be considered when advising on a solvent liquidation and expert advice in both these realms is key. The Company itself will be subject to any corporation tax on income arising in the period up to liquidation and after liquidation and very often there are tax considerations around for example the writing off of loans or proposed distributions in specie of assets. The second consideration is that of the Shareholders who will be taxed on their distributions from the Company in liquidation (as outlined above) whether these are distributions in cash or assets in specie, for example property.
In recent times HMRC have focused on the tax rules surrounding solvent liquidations to ensure that they are being used for their proper purpose and not merely as a vehicle employed by Shareholders to avoid higher rates of tax. HMRC’s Targeted Anti Avoidance Rule in relation to liquidations sets out specific circumstances for any distribution to be treated as capital and has brought the whole regime into Self Assessment. It is therefore vital that advice is obtained prior to liquidation to ensure that any distribution is dealt with and taxed correctly. Failure to do so may result in additional interest, penalties and costs being incurred.
It has recently also come to light that HMRC have changed their approach in relation to interest due on tax payments in a solvent liquidation which could lead to further costs if appropriate advice and planning is not undertaken prior to liquidation. When a Company goes into solvent liquidation a corporation tax return will be required up to the date of liquidation and the tax will fall due 9 months after that date. Up until now this has been the accepted position and the tax due has ordinarily been paid once returns have been submitted and the tax due has been agreed, at some point after the commencement of the liquidation.
Following a recent Court ruling HMRC are now informing liquidators that they consider that when a company goes into liquidation all taxes and returns become due on that date and they are therefore insisting that interest is paid on all taxes paid post liquidation. This is despite the fact that at the date of liquidation the tax will not have become due and, even further, it might not even be capable of being calculated.
The statutory rate of interest in this scenario is 8 % per annum and so additional amounts to be paid to HMRC could be significant. This approach by HMRC seems to be a departure from what has gone before and many liquidators are having to consider this on existing cases as well as advising those considering an MVL on this potential additional liability.
We have also heard of instances where assets have been distributed in specie and HMRC have taken the view that these distributions be classified as income rather than capital as would normally be the case. This approach could have a significant impact on tax paid by Shareholders.
It is therefore vital that advice is taken and all tax matters considered prior to embarking on a solvent liquidation and both our insolvency and tax specialists at Ensors are more than happy to assist and guide you through this potential minefield.
For more information please contact Lisa Haste.
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