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Outstanding S455 Tax to be Paid to HMRC in MVL

Offsetting S455 Tax due to HMRC with DLA Clearance

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Hi Everyone,

Thank you for taking the time to read my question and I was hoping somebody is able to point me in the right direction.

Background

A director (100% shareholding) had an overdrawn balance for Sep 2019 accounts and the S455 Tax liability that arose remains unpaid to this date. (DLA balance was 70k)

The DLA has become  overdrawn further to £105k for Sep 2019 Accounts and S455 tax is due outstanding for Sep 20 Accounts (as well as previous S455 liability to HMRC).

The client is looking to do a MVL where the distributable reserves of the company presently equate to £95k and the MVL has advised they can do a distribution in specie which will offset the DLA and the Director will make the shortfall payment to clear the DLA Balance.

The query which has been raised is does the client first need to pay the S455 tax to clear down the liabilities which are due to HMRC and then subsequently receive refund from HMRC or do HMRC offset the S455 tax liability and the repayment which now falls due. I have tried looking in the HMRC manual but I have not been able to locate this. I will be grateful if somebody is able to point me in the right direction? 

Replies (12)

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By johngroganjga
04th Aug 2021 22:25

Surely that is a question for the liquidator?

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By rmillaree
05th Aug 2021 09:53

From a technical perspective i am pretty sure the liability will exist until the relevant reclaim date (date you are allowed to reclaim tax normally 9 months and 1 day after year in i which repayemht is made ) - however once the reclaim date has been reached the original liability is cleared from the system .
I am pretty sure any interest charged for late payment would remain though if payment has not been made. Practicably speaking the tax issue goes away once reclaim has been fullly processed but client could be stuck with an interest bill if payment is not made. If you look on clients online acount the s455 tax that was added in the original year is always then removed so that year is back as it was before s455 was applied - only difference is that interest on s455 is not refunded as would be the case for loss carry back that works in simialr way.

These comments are from memery and run the risk of being completely wrong.

As johngroganjga has pointed out i would hope liquidator would sort everything out in that regard so would probably refer question onto them for clarification as to hwo they advise to best proceed.

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By Paul Crowley
05th Aug 2021 12:44

Is the company insolvent?
If all reserves are to be used as a dividend is the director scooping the pool
Company appears to be owed money by shareholder in excess of the dividend

More to this than posted?

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Replying to Paul Crowley:
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By rmillaree
05th Aug 2021 12:48

Paul Crowley
"Is the company insolvent?
If all reserves are to be used as a dividend is the director scooping the pool
Company appears to be owed money by shareholder in excess of the dividend
More to this than posted?"

I thought that was all covered by the OP here

The client is looking to do a MVL where the distributable reserves of the company presently equate to £95k and the MVL has advised they can do a distribution in specie which will offset the DLA and the Director will make the shortfall payment to clear the DLA Balance.

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Replying to rmillaree:
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By Paul Crowley
05th Aug 2021 20:30

Does not really need an MVL to sort out a company making a dividend to the shareholder
This sounds a bit DIY and noncompliant

Sounds a bit like a client that I took on 18 months ago that put a perfectly OK company into insolvency in hopes of not paying some outstanding tax.

Took no advice from their existing accountant ( as in did not discuss with them ).
An expensive lesson for client and the former accountant chose to completely disengage.
As you can probably guess, company 2 was set up ready to go before company 1 went to the Insolvency firm

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By The Dullard
05th Aug 2021 13:28

HMRC are highly likely to argue that the loans were never loans at all. They were amounts drawn from the company that were never intended to be paid, and thus distributions, taxable as dividend income at the time they were drawn. They have it rehearsed.

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By alpha2014
05th Aug 2021 21:15

Thank you all for your comments and update. Apologies in the scenario I forgot to add the director repaid £13k back to the company after the accounting period so his true DLA balance outstanding is now £92k (company is solvent). The only balances on the balance sheet are DLA in debit and Tax Liability in Credit.

I have managed to have a call with the liquidator today and he was pretty helpful. He gave the following advice for this scenario:
+He is unlikely to make a declaration of distribution of £94k whilst this tax liability is outstanding in the event HMRC do not accept the offset treatment between (s455 tax due and the distribution in specie to offset the DLA) - otherwise lead to a scenario of clawback if rejected so he will not go down that route.

Best outcome he advised is client needs to make the £30k tax liability and this will also reduce some of his DLA balance and he can get 10k of this back after 9m1day. Also ensures no further interest is accrued with HMRC on the outstanding liability

The timing is important of these events - the client needs to pay the outstanding tax liability 1 day prior to the appointment of the liquidator (so the accounting period comes to an end) and the appointed liquidators accounting period starts the next day for 12m (after which once the dividend in specie has been declared) the company will then receive the money 21m after his appointment.

@Dullard thank you for valid point I will discuss this with the liquidator/client - The client has paid some money back and continues to do this (albeit very slowly) but it is definitely worth raising this with them to get their input on this and if there are further steps he can take to reinforce the notion of these payments being loan and not treated as distribution at the time of taking the money out.

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Replying to alpha2014:
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By Paul Crowley
05th Aug 2021 21:39

Why is a solvent company dealing with an IP and looking for MVL
Just get a proper accountant to sort this all out
Accountants are cheaper than Insolvency practioners
I do of course mean a GOOD accountant

I refer to my prior comments

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Replying to Paul Crowley:
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By Matrix
05th Aug 2021 23:14

Are they hoping for it to be treated as a capital distribution? There have been threads on this before.

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Replying to Matrix:
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By alpha2014
05th Aug 2021 23:33

Matrix - would you kindly share the thread so I can look into it further as they are hoping this is treated as a capital distribution.

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Replying to Paul Crowley:
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By alpha2014
05th Aug 2021 23:41

Paul, thank you for the advice I apologies if you think I am not a good enough accountant - it is the first time I am dealing with a client who is going down the MVL route with a significant DLA balance. I would like to think I am competent and I am aiming for the best solution for my client. I have already spoken to a tax adviser on this matter around the MVL vs Dividend route however they did not bring up the issue about capital distribution being challenged by HMRC in the event of liquidation. Seeing the feedback I need to look at this further before the client takes the next steps with the IP.

Can I follow this up with yourself and I am happy to pay for your services if you are willing to engage for this work?

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Replying to alpha2014:
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By Paul Crowley
06th Aug 2021 09:43

Send me a PM
The word client is used by bookkeepers, not just accountants
Have you done the arithmetic on considering whether dividend is better than capital distribution?
If capital is chosen then MVL is the route together with associated costs.
If there are no time issues, spreading the dividend is viable
Critical issue really is how did client get into such a mess

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