New HMRC practice on interest charges for company liquidations
Members’ voluntary liquidations (MVLs) are often used to reduce tax liabilities when closing down a business run through a limited company.
One criterion for entering MVL is that the company must be able to pay all of its debts within the first year. Following the recent Lehman Brothers case, HMRC have altered their position on the amount of interest payable on any tax debts in such cases.
Where the directors are looking to place a company into solvent liquidation to improve the tax position for shareholders on closure, the general benefit is that the distributions are normally classified as capital as opposed to income. In addition, there is the possibility to claim entrepreneurs’ relief which further reduces the tax liabilities.
To benefit from an MVL, the company distribution must be in excess of £25,000 to members and shareholders must be individuals rather than companies.
Previously on MVL matters, HMRC adopted the position that interest was only payable on corporation tax debts from the date they fell due (typically 9 months after the period end date), and based on the normal late payment rate for corporation tax (typically around 3% p.a.).
Following the Lehman Brothers case, HMRC policy is now that statutory interest applies (at the rate of 8% p.a.) from the date of liquidation, even if the corporation tax debt has not yet fallen due.
The reason for this is that in the Lehman Brothers case, the court determined that statutory interest is payable on future and contingent debts, from the date of administration or liquidation. The result of the change is, effectively, an additional tax on monies in MVLs.
Where there are significant assets which must first be sold in the liquidation, it may be some time before creditors can be paid. This could result in additional statutory interest.
When there is only a cash distribution to be dealt with, there is still a dividend process to comply. This means that one to three months of statutory interest will still be payable to HMRC, even if paid at the earliest opportunity.
One way to avoid paying the statutory interest may be to pay off the tax debts on or before the date of entering MVL based on the amount expected to be due.
If the figures are less certain, it may be prudent to overpay the tax debts and allow the insolvency practitioner to reclaim in balances to distribute in the liquidation. This may result in less cash in the short term. However, it would achieve a greater return to shareholders in the long run, by mitigating interest charges on the final corporation tax bill.
For further information or advice, please contact:
t: 01245 254221
t: 01702 606831
This is intended as a summary and overview of the tax situation and does not constitute financial advice and no action should be taken without first seeking professional advice specific to your circumstances.