Solvent liquidations update

We continue to see a number of companies entering solvent liquidation (MVL). This procedure is often used as a tax efficient and effective way of bringing a company’s affairs to a conclusion and the shareholders extracting their capital. Scenarios such as retirement, restructuring or a company having simply fulfilled its purpose are common reasons.

Over the last few years 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 means to avoid higher rates of tax.

Once a company enters a solvent liquidation the accounts and tax affairs are brought to a conclusion for all pre liquidation periods and tax settled and clearance is then sought from HMRC that everything is concluded.

In recent months HMRC have been insisting that interest at the judgements rate is paid on all taxes paid in the liquidation which relate to pre liquidation periods – even if they would not normally be due for payment until a later date. HMRC are contending that all taxes fall due on the liquidation date and that they are entitled to statutory interest.

Statutory interest is payable on any creditors paid in any liquidation however the approach taken by many insolvency practitioners is that where that tax is paid earlier than what would be the normal due date then interest should not be due.

We are waiting for some further guidance on these issues but these are important considerations for company’s that are in or considering a MVL. The statutory rate of interest runs at 8% per annum and so the company may end up having to pay much more in tax than they expected. The importance of getting professional advice on these matters can not be over emphasised.

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