HMRC alters position on liquidations
Changes being made by HMRC about how debt interest is calculated and directors’ loan accounts are distributed in a members voluntary liquidation (MVL) need clarification, says the chair of the North London Society of Chartered Accountants Paul Weber.
A members voluntary liquidation (MVL) is often considered a legitimate mechanism to reduce tax liabilities for shareholders by way of entrepreneurs’ relief subject to certain conditions. A criterion for entering MVL is that the company must pay all of its debts, together with statutory interest from the commencement of the liquidation, within 12 months, with any taxation liabilities being payable on the due date.
Following the principles arising out of the Lehman Brothers case, HMRC has altered its position. It is now requesting statutory interest at the rate of 8% from the date of liquidation to be paid, even if the corporation tax has not yet fallen due.
This is further defined under Rule 14.23 Insolvency Rules 2016 (IR16). This states that interest is payable from the relevant date, the commencement of the liquidation, where a debt is provable in insolvency proceedings, albeit this is a solvent liquidation. Rule 14.44 IR16 states where the debt, for example HMRC, has been proved and is payable in the future, time may be reduced by using a formula X/1.05n where X is the value of the admitted proof and n is the period from the relevant date to the date the creditor’s payment is due expressed in years or part thereof.
At present R3, the professional body representing insolvency practitioners, is liaising with HMRC Policy Section for clarification as to whether there has been a change in policy and will update members in due course.
Another potential change relates to overdrawn directors’ loan accounts that are distributed in specie, as opposed to being repaid prior to liquidation and paid as a cash distribution. HMRC are trying to reclassify this as income by way of a stand-alone case. Similarly, it is unknown if this is a policy change.
As a result of this change, when advising directors it would be prudent for them to pay the corporation tax or any other tax prior to the liquidation and for the liquidator to recover any overpayment from HMRC once their final claim is agreed.
Paul Weber ACA FCCA FABRP from Leigh Adams Ltd is an ICAEW Chartered Accountant and licenced insolvency practitioner, and the chair of the North London Society of Chartered Accountants
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