Tax Planning for Directors on the Cessation of a Solvent Company
Insolvency legislation and Insolvency Practitioners have generally been associated with individuals and business entities facing financial difficulties.
However, an amendment to the Insolvency Act has helped to simplify matters and provide an effective tool for stakeholders to wind down or reorganise the affairs of a company thus maximise tax planning opportunities.
As part of the Members’ Voluntary Liquidation (“ MVL”) process, a section 110 Insolvency Act 1986 demerger can effectively deal with diversifying the ownership of business activities in order to divide assets within a company for tax planning measures or as part of a restructure of shareholders interests.
By using the MVL, it is possible shareholders can also take advantage of Entrepreneurial Relief at 10% rather than succumbing to the higher income tax rates through an informal wind down.
In this article, we summarise the tax advantages of using the MVL tool as opposed to an orderly wind down and striking off and the tax implications of each. Hopefully, this will allow your clients to make an informed judgement as to which process provides the most cost and tax effective mechanism available.
In accordance with section 1003 Companies Act 2006, an application can be made to the Registrar of Companies to have the company struck off the Register.
A company can apply to the Registrar provided that within the last 3 months it has not:
- Changed its name
- Traded or carried on business activities
- Disposed of property for value or rights which, before it cease trading, it used in the normal course of business; or
- Engaged in any other activity unless necessary to effect the striking-off application or settle the company's affairs
A company will not be struck-off the Register if:
- The company is in administration or an application for an administration has been made
- The company is subject to a windig up petition
- A company voluntary arrangement has been proposed and is not yet concluded
- A receiver has been appointed over the property; or
- An application has been made to court for a scheme of arrangment
Assets prior to strike-off
Upon dissolution, all of the company’s remaining assets will become bona vacantia and will revert to the Crown. It is therefore imperative that all assets are extracted or properly dealt with prior to the dissolution.
Members Voluntary Liquidation “MVL”
What is an MVL?
An MVL is a liquidation process that is available to a solvent company. The directors are required to sign a Declaration of Solvency, which states that the company will be able to discharge its liabilities, including statutory
interest within a 12 month period.
Benefits to the shareholders
An MVL process is an out of court process and can be effected quickly in order to make the appropriate returns to the
shareholders. In some cases, the liquidator can make the appropriate distribution immediately on their appointment making this attractive to shareholders.
An MVL is often used in a Group restructuring process or as part of an exit route for shareholders.
As the company must be solvent, there is no negative stigma attached to an MVL.
Tax implications of Dissolution v MVL
Extra Statutory Concession (ESC) C16 was a concession granted by HMRC that permitted the directors of a company to effectively wind up a solvent company themselves without the requirement to appoint a liquidator and pass the surplus funds to the shareholders as capital receipts rather than dividends. This had the benefits of:
- Likely lower tax liability for the shareholders
- Avoiding the costs of a liquidator
However, in 2005, the House of Lords ruled that HMRC’s discretion to offer ESC’s was limited, and as a result, ESC’s have on an ongoing basis either been scrapped or incorporated into legislation.
On 1 March 2012, the Extra-Statutory Concessions Order 2012 came into force placing ESC C16 onto a legislative, restrictive basis. Article 16 of the Order inserts sections 1030A and 1030B into the Corporation Tax Act 2010.
C16 relief is now no longer a concession to be applied for, it is automatic under the legislation, with a £25,000 cap on the total amount that can be distributed in anticipation of company dissolution for capital, rather than income.
However, distributions made in anticipation of dissolution of the company will not count as “dividends” subject to dividend tax, if the total amount of the distributions does not exceed £25,000. The moment distributions exceed £25,000, all of the distributions will count as dividends, resulting in an additional tax liability for higher-rate
There may be circumstances when a company distributes all but £25,000 as ordinary dividends, applies for the dissolution of the company, then distributes the remaining £25,000 as capital receipts. HMRC are likely in this event to argue that the intent to make an application under section 1030A to strike off the company pre-dated the actual application to dissolve the company, therefore the amount of any prior dividends should be taken into account when determining whether the £25,000 limit has been breached. Intent is likely to be inferred should the company dispose of remaining assets, leaving only cash at bank prior to the application for dissolution.
The replacement of ESC C16 has created some uncertainties which have not yet been resolved and is likely to take some time. It would seem reasonable to suggest, therefore, that the prudent way to ensure capital treatment of distributions without limit is for the company to be placed into Members Voluntary Liquidation. It is expected that for
shareholders who are higher rate taxpayers and would therefore have an additional dividend tax liability to pay, it will be tax advantageous for any company not falling within the £25,000 limit to be placed into MVL.
Directors/Shareholders should obtain a fee quote for an MVL in the first instance and then consider whether this cost is more than offset by the higher tax liability that could be incurred by using the dissolution method.
Leonard Curtis have dedicated experts in this area who would be delighted to discuss your requirements or the requirements of your clients and can discuss costs on a tailored, case by case basis.
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