Members Voluntary Liquidations – and Entrepreneurs Relief
Simon Parker Looks Back at the Government’s Consultation Document Issued on 9 December 2015
In light of HMRC’s recent (2017) change in policy regarding Corporation Tax Payments in Members Voluntary Liquidations, we take a look back at the last major change by the Government to Members Voluntary Liquidations – the area of Entrepreneurs’ Relief.
Who was affected?
Shareholders of close companies seeking to extract profits by winding up their company, but who intended to continue to trade or work in the same industry.
Consultants or individual contractors who provide personal services through a company will be particularly affected.
Under previous legislation, many such companies would have paid salaries and dividends within tax free limits or basic rate tax and have accumulated cash within the company. At the end of the useful life of the company, it was common practice for such companies to be wound up via a Members Voluntary Liquidation and the accumulated assets distributed to the shareholders as a capital gain. In some cases, shareholders were eligible to claim Entrepreneurs’ Relief (“ER”) and to pay Capital Gain Tax at 10% on all funds distributed to them.
On 9 December 2015 the government issued a consultation document which called for significant changes to Entrepreneurs’ Relief.
The changes came into force on 5 April 2016 and meant that Entrepreneurs’ Relief would not be available, where a shareholder received a distribution from a close company in liquidation after 5 April 2016, where he or she:
“continues to be involved with the carrying on of a trade or activity that is similar to that of the trade or activity carried on by the wound up company in two years following the date of distribution.”
In essence the Government was looking to prevent shareholders from extracting cash from their companies purely to avoid tax.
Shareholders who were simply retiring were not affected by the proposed changes.
What action needs to be taken?
Our advice was that accountants and tax advisors with clients who were considering winding up a close company should urgently review the likely impact of these changes. If the company being wound up has assets greater than £25,000, it must be wound up via a Members Voluntary Liquidation.
In order to benefit from the old rules, prior to April 2016, companies had to be wound up and funds distributed prior to the new rules taking effect.
The Recent (2017) Change in Corporation Tax Payments for Members Voluntary Liquidations