HMRC have recently announced changes in their policy for 'assisting' with the closure of companies, using the Members' Voluntary Liquidation process, a well-used method for business owners to close their solvent companies. The changes in policy may affect both the speed with which a business owner can realise funds on closure of the company and also the amount of information they are required to provide to the appointed Insolvency Practitioner. We take a look below in further detail.
On 6 December 2023 HMRC announced a key policy change regarding ‘Tax Clearance’ in a Members Voluntary Liquidation (“MVL”). Below is a summary of how we think this might impact both shareholders of companies wishing to liquidate their solvent companies and their accountants.
BACKGROUND
As a reminder, an MVL is a formal insolvency process which enables shareholders of a solvent company (one which can pay its debts as they fall due) to wind up the business and to distribute the assets as capital. The process is formalised by the involvement of an appointed Insolvency Practitioner.
The MVL process involves the company paying all creditors in full, before paying the balance of funds to shareholders. The payment of remaining funds to shareholders are generally taxed at a current low rate of capital gains tax of 10%. This is far lower than tax rates attached to withdrawing the same funds as dividends or salaries.
HMRC has historically played an important part of the formal MVL process, providing “clearance” that a company’s tax affairs and debts were up to date. An Insolvency Practitioner, who usually has no prior knowledge of a business’s affairs, could use this clearance to provide comfort that all HMRC debts had been paid and that the withdrawal of remaining funds and closure of the company could be authorised.
WHAT’S CHANGED?
From 7th December 2023, HMRC will no longer provide this clearance. So, where does the MVL process go from here?
Insolvency Practitioners will no longer receive the clearance, and therefore confirmations, from HMRC that there are no outstanding tax issues. As tax forms a major part of any company’s creditor history, this could cause logistical issues in how MVLs are processed.
IS THIS GOOD OR BAD NEWS?
Good news
The clearance document from HMRC did not in fact have any legal standing. Clearance was issued, with numerous qualifications, enabling HMRC to ‘back-track’ should it need to. In our many years in practice, we were never subject to rescinded clearance.
The Clearance process also took a long time – as HMRC staffing levels decreased over years, this only got worse. We had cases at PSB which took over 60 months to finalise, leaving shareholders (and us!) extremely frustrated.
The new process should, in theory, be far quicker, provided shareholders can provide appropriate evidence required by an Insolvency Practitioner (see below). It may not, however, be as quick as some would imagine, due to formal processes that still need to be followed – ultimately, if an Insolvency Practitioner is not satisfied with the level of confirmations and evidence received, they will not be obliged to authorise formal closure of a company.
Bad news
If the Insolvency Practitioner doesn’t have the comfort of clearance from HMRC, they will need some other evidence to prove that the company’s tax affairs are fully in order. It’s therefore likely that company Directors will have more work to do. In most cases, they will no doubt need their accountants' help with this extra work.
Insolvency Practitioners may want to see detailed information including, for example: -
- Historic records for additional time periods, over and above what has previously been required
- Financial statements submitted to HMRC
- Company Tax Returns
- Bank statements
- Accounts to the date of cessation
- Details of all the taxes the company was registered for
- Confirmations and evidence that
- VAT, PAYE and any other tax schemes have been closed
- the company has not participated in any tax avoidance scheme (to ensure there is no rebound)
- final period tax liabilities have been paid
- Statements from HMRC showing the closing tax position
Insolvency Practitioners (and indeed their Insurers) may also require formal indemnities to be provided by shareholders ahead of any distribution of funds.
Importantly, the low rate of capital gains tax on distributions in MVLs have not been changed. The HMRC policy changes for MVLs are unlikely to deter those who qualify for the low rate of tax and wish to formally close their company. However, shareholders will need to be prepared for a greater level of input on their part and may need the assistance of their accountant. For those who don’t have adequate evidence or are unprepared to pay their accountants to assist, the new MVL process could become an administrative headache and time consuming exercise.
As ever, if you have any queries regarding insolvency matters, please do not hesitate to contact a member of the PSB team.