No more HMRC tax clearance for Members’ Voluntary Liquidations

On 6 December 2023, HMRC published a bulletin regarding its decision to cease providing pre and post appointment tax clearances to Insolvency Practitioners (IPs) acting as Liquidators of Members’ Voluntary Liquidations (MVLs) – i.e. solvent liquidations.

This change was applied with immediate effect, meaning outstanding requests already submitted to HMRC will not be responded to. It is our understanding that, instead, Liquidators should “close cases without tax clearance, subject to their professional judgement”.

Whilst it is the case that there is no statutory framework for HMRC to provide tax clearance, it has long been industry practice for Liquidators to obtain written clearance from HMRC before moving to close MVLs. This new announcement is a fundamental change which will affect the steps required to be able to conclude solvent liquidations. However, it should, in the main, eliminate a growing frustration whereby clearance requests would routinely go unanswered for many months.

In light of this news, our specialist Insolvency and Recovery team are reviewing the guidance issued by their trade association, R3, and seeking clarification on any alternative actions that should now be taken to protect the interests of all stakeholders. We will share further information and clarification on this as it becomes available. What is already clear, however, is that it will now be more important than ever for business owners to work collaboratively with their chosen Liquidators, accountants and tax advisors to ensure all tax matters are fully dealt with prior to commencement of a solvent liquidation, or there is at least an agreed strategy for dealing with any matters that cannot be resolved prior to appointment.

What do I need to consider?

Prior to the appointment of the Liquidator

Prior to the appointment of a Liquidator, business owners should work with their advisors to ensure that:

  • Accounting records are of sufficient quality to allow all tax filings to be made
  • Tax filings are up to date across all heads of tax and all outstanding taxes have been paid
  • There is no ongoing HMRC enquiry into any matter
  • Copies of elections and filings for pre-appointment periods are reviewed and appropriate action taken, e.g. surrender of group relief or the removal of the company from a VAT group
  • Contact is made with the Customer Compliance Manager at HMRC, where appropriate, regarding the company’s tax compliance
  • The balance sheet is simplified as far as possible to ensure that matters that require the company to be a member of a group are dealt with, e.g. the release of inter-company debts.

Following the appointment of the Liquidator

Following their appointment as Liquidator, the IP (now as the Proper Officer of the company for tax purposes) will have at least two periods for which they will need to file corporation tax returns with the assistance of the company’s accountant.

These periods are:

  • The period ending on the day immediately before their appointment with any tax due ranking as a creditor claim; and
  • The period (of up to 12 months) starting on the day of their appointment, with any tax due ranking as an expense of the liquidation.

Ideally, all pre-appointment tax returns should be filed prior to the liquidation and the resulting tax liability paid (even if not yet due). If this is not the case, a Liquidator will wish to file any pre-appointment tax return as soon as possible after appointment and will need to settle the liability, plus statutory interest at 8% per annum from the date of liquidation.

Where appropriate, and if not actioned prior to liquidation, a Liquidator will also need to:

  • File any final quarterly returns prior to de-registering the company for VAT
  • Submit any outstanding payroll tax filings and close the scheme
  • Satisfy themselves and clearly document that all other relevant filings have been submitted for the post-appointment period.

Only once the Liquidator is satisfied that the company is dormant, all tax filings have been made and all relevant taxes paid for both the pre and post-appointment periods, will they proceed to notify HMRC of the intention to dissolve the company and exit from office. Reasonable time will still need to be given to HMRC to process any returns before closure, as this is likely to reduce the risk of a subsequent enquiry.

It is likely, in the absence of clearance letters being issued, Liquidators will also routinely send ‘notice of intended dividend’ to all potential creditors, including HMRC, to give a final opportunity for any claims to be submitted but this cannot be solely relied upon.

We are advised that, in the event that the company is dissolved and HMRC believes that its tax affairs have not been dealt with satisfactorily, then their recourse would be to either apply to restore the company to the Register or to employ secondary liability provisions to recover funds from other parties, e.g. against any broader corporate group, the directors, the shareholders or, in very limited circumstances, to IPs themselves. For this reason, the Liquidator is increasingly likely to seek indemnities from shareholders who receive capital distributions, as a form of protection if it later transpires that there were unknown or undisclosed liabilities to creditors (including HMRC).

Engaging as early as possible and agreeing a clear strategy with your advisors is key to a successful outcome for all stakeholders of MVLs. If you have any queries regarding the tax clearance change or the MVL process in general, please contact the Insolvency & Recovery team using the form below.

2017 – Introduction of 8% statutory interest for Members Voluntary Liquidations (MVLs)

HM Revenue & Customs (HMRC) previously applied interest on corporation tax debts from the date that they fell due, with a 3% rate applicable in late payment fees.

However, HMRC have changed their policy, following a recent court ruling in the Lehman Brothers case, regarding statutory interest charged on taxes due after the commencement of a Members Voluntary Liquidation (MVL).

What is Members Voluntary Liquidation?

Members Voluntary Liquidation (MVL) is a solvent liquidation procedure often used by the shareholders of a company as an exit strategy to improve their personal tax position. The tax liability can be reduced because the distribution of funds and/or assets is considered to be capital rather than income, with further reductions available on claiming entrepreneurs’ relief.

What has changed and when will it take effect?

Following the ruling, HMRC have begun exercising their right to charge statutory interest (payable at the Judgements Act rate of 8%) on tax falling due after the commencement of a MVL, regardless of whether the due date has yet passed. Accordingly, 8% interest will accrue on all tax liabilities from the date a company is placed into liquidation until the date of payment. This is being applied immediately and could have significant implications.

How will these changes affect you?

This is an additional amount payable to HMRC in solvent liquidations where there is a tax liability on the appointment of liquidators. It was previously uncommon to pay HMRC liabilities early in solvent liquidations but this could now become commonplace.

The good news, however, is that there are provisions within insolvency legislation that allow a Liquidator to discount creditor claims where settled prior to their due date. For example, a 5% discount (pro-rated) is available on the amount payable to HMRC so as to effectively reduce the tax liability.

When considering liquidation, careful planning is required and every attempt should be made to settle all tax debts prior to the commencement. Failure to do so could have a significant impact on the return to the shareholders.
What should you do?<
It will be important to involve an insolvency expert in any early discussions where a MVL is being considered as part of a wider exit strategy. We can help to ensure unnecessary interest charges are avoided.

If you have any queries regarding the policy change or the MVL process in general, please contact the Insolvency & Recovery team using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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