There are many reasons for liquidating a limited company which aren’t necessarily related to business failure. Winding up special purpose vehicles (‘SPVs’) has always been a common requirement where the company was set up for a specific project or joint venture with a known shelf life. A Targeted Anti-Avoidance Rule (‘TAAR’) was brought in, for certain circumstances, from 6 April 2016 in the Finance Bill 2016 with four specific conditions which, if met, countered the use of capital distributions for the extraction of profits as being tax avoidance. Instead these final distributions would be treated as chargeable to income tax with the resulting loss of CGT tax advantages such as Entrepreneurs’ Relief.
Whilst needing to be aware of the TAAR, director shareholders of companies contemplating a Members’ Voluntary Liquidation (MVL) should also be very careful about cash transactions pre-liquidation. It has been common practice to take out cash pre-liquidation by way of a loan account and for that loan to be cleared by a distribution in specie by the liquidator.
Recently HMRC is understood to be charging an in-specie distribution of an overdrawn directors’ loan account by a liquidator as income rather than capital. Income treatment of such amounts would cause entrepreneurs’ relief to be lost and an increase in the tax liability of up to 281%. The amounts involved are often quite large.
The technical basis for HMRC’s position is not yet clear but, in the interim, it is important for clients to be aware of the risk and to take whatever protective measures may be available, including repaying the loan in advance of liquidation.
It is also a requirement for all tax liabilities to be settled immediately; in particular Corporation Tax, or interest will be charged and the liquidation process may be held up.
We will update you when the position becomes clearer.