HMRC now charging Interest in MVLs

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Debbie Cockerton highlights interesting developments that may affect clients looking at the Members Voluntary Liquidation route.

When shareholders wish to close down their limited company and take advantage of paying lower taxes they need to go down the solvent liquidation route, entitled Members Voluntary Liquidation (MVL). MVLs are often used to reduce tax liabilities and take advantage of entrepreneur’s relief.

This blog is taken from the ICPA website. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.

To go along this route, the company must be able to pay all its debts within 12 months and for this route to be beneficial, the company must have in excess of £25,000 to be distributed to the shareholders of the company. The tax advantage is, of course, to apply entrepreneur’s relief on capital distribution of profits to members in the liquidation and to then pay only 10% tax, as opposed to paying the full dividend rate that applies to them.

There have been tax changes from April 2016 that changed the suitability for these solvent liquidations and, to elaborate, HM Customs & Excise have advised that the liquidation may NOT be utilised in the following circumstances:

1. A distribution from the company in respect of shares in a winding up.

2. Within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity.

3. The arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.

HM Revenue & Customs does not consider the above types of cases as being genuine circumstances of where a business needs to close down, as opposed to just saving tax. This system prevents the ‘phoenix’ situation whereby shareholders just shut down and start over doing the same thing, having removed all of their cash, at a lower tax rate.

As this change came into force in April 2016 we have all taken these changes on board, but now there is another hurdle that the shareholders have to jump over.

Previously on MVL matters, HMRC stated that interest was only payable on corporation tax debts from the date they fell due, which was typically nine months after the period end date, and are based on the normal late payment rate for corporation tax, typically around 3% per annum.

Following the Lehman Brothers case, the policy of HMRC is now that statutory interest applies (rate of 8% per annum) from the date of liquidation, and this is even if the corporation tax debt has not fallen due yet.

The reason for this change, is that in the Lehman Brothers case, the court determined that statutory interest is payable on future and contingent debts, from the date of liquidation. The result is that effectively, there is an additional tax on monies in any MVL case.

The problem will be that where there are significant assets that must first be sold in the liquidation, it could be some time before creditors can be paid by the liquidator and this could therefore result in the company paying additional statutory interest to HMRC.

HMRC continue to insist that statutory interest must be paid on pre-appointment corporation tax (CT), even if it is paid prior to the normal due date.

It would seem that this current situation is taking a farcical turn as we have heard that a company duly paid the pre-appointment CT and the statutory interest to the HMRC office responsible for dealing with the company’s CT, only to receive a cheque back for the statutory interest!

The company’s liquidator then would not be given tax clearance until the outstanding statutory was paid by the company via the liquidator.

The liquidator in question spoke with the MVL team in Edinburgh after waiting on the phone for a long time, only to be advised that the offices responsible for CT in HMRC do not understand and are unable to deal with statutory interest. Instead the statutory interest must be sent separately to the MVL team.

No formal advice

There has been no formal advice from HMRC on this topic and this is only one example, but no doubt the MVL team of HMRC will want statutory interest to the date of payment, even if the payment was delayed as a result of another department within HMRC not being able to process the payment, you may have to make a payment for statutory interest direct to the MVL team in Edinburgh and not to include it in the normal payment.

HMRC are now chasing the liquidator for interest on any payment of CT that is due for payment at a later date, and they are using the date of the liquidation as a starting date. One way to avoid paying statutory interest may be to pay off the tax debts on or before the date of the company going into liquidation and this would be based on the amount expected to be due.

The earlier that advice is sought from an insolvency practitioner, the better and then there are options. DCA Business Recovery offer free advice in complete confidence and will assess the situation and look for a solution to the problem. The dedicated ICPA Freephone Hotline on 0800 066 2540 is open 365 days a year, from 8am to 8pm should you require any advice with regards to a solvent liquidation vis a MVL.

• Debbie Cockerton is a Partner at DCA Business Recovery