Corporation Tax and Members Voluntary Liquidations
A Change in Corporation Tax Payments for Members Voluntary Liquidations
HMRC has recently announced a change in policy when dealing with corporation tax payments in Members Voluntary Liquidations, which features statutory interest at 8% per annum. The last big change in the legislation surrounding MVLs was to Entrepreneurs’ Relief, which came into force in April 2016. This was a move by the Government to prevent shareholders from extracting cash from their companies purely to avoid tax. In this article we look at HMRC’s latest change, how it works and suggest that good planning is important to minimise its effect.
Members Voluntary Liquidations – What are They and Why are They Recommended?
MVLs are solvent liquidations, usually recommended by accountants and tax advisors to clients as a tax effective mechanism to withdraw accumulated profits from a limited company, if that company has stopped trading and is no longer required. This is usually because:
- The business has been sold by the limited company, especially in the SME market place
- The business owners are retiring
- A business has been set up for a specific project that has completed
In all cases, the profits and accumulated reserves need to be extracted from the company by its shareholders, and the process used to achieve this is the Members Voluntary Liquidation.
MVLs are popular because they carry some good tax advantages. HMRC had already taken steps in 2016 to curtail some of these tax advantages by making significant changes to Entrepreneurs’ relief. Now recent case law has provided another opportunity to squeeze a bit more tax out of those business owners looking to extract their accumulated profits using a solvent liquidation.
What was the Existing Policy?
Prior to this change, HMRC used the normal due date for the payment of corporation tax, even if the MVL commenced before the due date. If the tax was paid after the due date (which is not uncommon, as shareholders might be waiting for the company’s property assets to be sold to raise the funds they want) then HMRC would only seek interest of 3% from the due date.
What is the New Policy?
As can be seen, the old policy was not particularly punitive in the way it taxed corporation tax payments arising out of Members Voluntary Liquidations. With the new policy, however, HMRC will claim statutory interest at 8% per annum, starting from the date of liquidation, even if the normal due date for corporation tax hasn’t yet passed.
That’s quite a change, and it’s based on the outcome of one of the Lehman Brothers’ Court cases which decided that statutory interest applies to debts payable at a future date. Although the Lehman Brothers’ case is not a Members Voluntary Liquidation, it appears that HMRC are relying on a similarity in the wording of the legislation that applies to liquidations and debts payable at a future date, in order to implement the changes to MVLs.
And it’s not just corporation tax – the same principle would apply to all taxes payable at a future date, including VAT and PAYE.
So, What Can be Done? Can Statutory Interest be Avoided?
The complicating factor is that because some tax debts only crystallise at the date of liquidation, the precise liability might not be known. Furthermore, HMRC can’t accept a tax return or a VAT return until the start of the Members Voluntary Liquidation and they have been notified of the end of an accounting period.
That said, if statutory interest is to be mitigated or avoided, then our recommendation is to plan ahead for the liquidation and consider taking these steps:
- Calculate and pay any tax for periods that have already closed, even if the tax is not due yet
- Estimate the liabilities for the closing periods and make payments on account prior to the MVL commencing. In our experience it is easier to either top up or receive refunds from HMRC at a later date
No two Members Voluntary Liquidations are the same and for this reason it might well not be possible to pay any taxes that are due before the commencement of an MVL. One such reason is if a property needs to be sold.
However, forewarned is forearmed and the earlier we meet to discuss the details of the proposed MVL the better.
Are HMRC Looking at any other changes for MVLs?
We don’t know for sure, but with the changes to Entrepreneurs Relief in April 2016 and these recent policy changes, clearly HMRC are getting tougher on the tax benefits available to shareholders in MVL’s and the tax extracted from companies entering the process.
We are also aware that Director Loan Accounts are under scrutiny at the moment, focusing on overdrawn director loan accounts that accrue before the start of the MVL, but which are then distributed in their current form after the MVL is in place, as opposed to being physically repaid. In other words it seems that HMRC is attempting to classify capital distribution as income, using the argument that the funds were advanced before the date of liquidation.
We understand that this is a test case at the moment. However, it seems clear that tax charges are on the agenda for loan accounts not repaid by April 2019 following the Finance Bill 2017.