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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