Make sure your clients don’t breach the anti-avoidance legislation. A Members’ Voluntary Liquidation (MVL), often referred to as a ‘solvent liquidation’, can be used by shareholders as a method of extracting funds and other assets from a limited company in a tax efficient manner, as such distributions are treated as capital rather than income, therefore attracting a lower tax rate.
Members’ Voluntary Liquidations
Changes to legislation regarding such distributions came into force on 5 April 2016, in an attempt to stop repeated tax avoidance. The changes focus upon individuals who have; been shareholders in closed companies, have received a distribution in respect of that shareholding via an MVL, and within a period of two years after the distribution, continue to be involved in a similar trade or activity. We have seen a number of situations whereby shareholders (and their advisors) have put themselves at risk of HMRC retrospectively treating distributions as income rather than capital because of the nature of their involvement in a similar trade within two years of the liquidation. By way of example: Mr Smith is a shareholder in Smith Limited, a painting and decorating business. Following years of trading, a sale of assets, and payment of all liabilities, the company is left with cash at bank of £100k. Mr Smith appoints an insolvency practitioner to liquidate the company via an MVL, £100k is distributed as capital, and Mr Smith pays HMRC £10k (ignoring other reliefs). After 18 months of retirement, Mr Smith decides to ‘involve’ himself in the painting and decorating trade once again, thereby running the risk of HMRC retrospectively treating the £100k distribution as income and not capital, which will significantly increase his personal tax liability. This will be dependent upon the nature of this ‘involvement’. Despite this being legislation since April 2016, we are still seeing instances of MVLs being entered into without an awareness of the restrictions in place over the following two years. As per the example above, this can trigger negative tax implications for your clients.
Get in touch with The Insolvency Experts
If your clients are considering an MVL, we recommend speaking to us first to ensure that they are fully aware of the process and the potential future implications. For more information about MVLs, get in touch with The Insolvency Experts today. Contact us online or call our team directly on 0300 303 8284. We can provide expert business debt advice on liquidation, administration and more.