Following the Autumn statement there’s a consultation document about taxation of distributions from members voluntary liquidations (MVLs), amongst other things. Google something like “HMRC liquidation consultation document 7029” to see the full PDF…though be warned in typical HMRC style despite covering a fairly small topic it’s a hefty 19 page PDF.

From some of the marketing I’ve seen from liquidators and accountants alike, I believe the impact of these changes is being massively overstated.  This may simply be a questionable marketing tactic from the liquidators specifically, “buy now or miss out forever”, with the truth being considered unimportant…but I appreciate many of you will be aware I’m partly behind MVL Online so may consider myself being biased.  I like to think not, though it does mean I’ve taken more of an interest in these tax changes than many accountants might.

So, what is actually changing?

Basically the already existing anti avoidance legislation transactions in securities is being beefed up a bit.  It attempts to prevent people continuing to trade whilst still getting cash out under the normally friendly capital gains tax (CGT) rules.

Old/existing rules

There already is anti avoidance legislation in place to prevent the above scenario, but it’s fair to say a lot is left open to interpretation, with little in the way of clear cut black and white rules to check whether you’d be caught. This legislation is able to look through any liquidation if they successfully argue the underlying trade continued.  Ie someone transferred the trade and assets (except hefty cash balance) from Oldco to Newco, then liquidated Oldco to get the cash out tax efficiently.  If so, they’ll tax the distributions as dividends rather than via CGT.

One of the main problems from a clarity perspective is that it was left very unclear as to where the line would be drawn between a trade continuing just with someone taking a brief holiday, vs the old trade properly ceasing and a new trade starting.  People threw around various timescales for this, from a couple of weeks, to multiple years…but reality is we were all guessing how HMRC might interpret it, and perhaps more importantly how a judge might if it went to tribunal.

New rules

The new rules (still under consultation at time of writing) have set a clear cut two year timescale on this.  Ie if you liquidate today and set up a new company doing a similar thing in 18 months time, be warned you could see those liquidation distributions taxed on you as dividends rather than capital gains.

One other thing that’s been clarified is that the business type doesn’t need to be the same.  This unfortunately (though probably deliberately) means it will catch those looking to disincorporate following the new dividend tax.  By this I mean close down their Ltd Co and instead start again as a sole trader/partnership.

The three conditions to be caught

Distributions as part of a liquidation normally taxed via CGT would instead be taxed as dividends if all the following conditions are met:

• Condition A – An individual who is a shareholder in a close company receives from it a distribution in respect of shares in a winding-up;
• Condition B – Within a period of two years after the winding-up S continues to be involved in a similar trade or activity; and
• Condition C – The arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.

A will realistically apply to the vast majority of the situations I’m thinking of, being a small owner managed company that’s cash rich, coming to an end and being liquidated.

B is open to interpretation as to exactly what counts as “a similar trade or activity”.  In particular see bit about PAYE further down.

C again is a little unclear.  There may be many reasons for liquidating a company, but cynic in me thinks where the tax treatment is beneficial when compared to dividends, it’s likely HMRC could argue this point does apply regardless of what other genuine motives there may have been.

So should I be scared?

If you plan to use an MVL to get cash out tax efficiently then immediately restart a new business doing exactly the same thing, then yes!  In fact you should be caught under the existing rules.

If you have no intention of restarting, then no!  If you’re liquidating your company for reasons such as:
– emigrating,
– retiring,
– doing something completely different,
then it doesn’t matter whether you’ll be getting lots of cash out upon liquidation at a nice, friendly tax rate.  You’ll be fine whether you liquidate before or after 5 April 2016.

Do take a bit of care that despite your intentions at point of liquidation, if circumstances change and you get an opportunity to go back to what you were doing before within 2 years, you could be at risk.  Arguably this is the only thing that is changing in practice.

There’s also suggestion that the new rules are likely to make MVLs less appealing, at least from a tax perspective, for property special purpose vehicles (SPVs).  Many property developers choose to regularly liquidate and restart a clean company.  Sure, tax can be one reason, but another key one is limiting liability.  Ignoring any ethical/moral question, this can be a good idea.  You do a large piece of building work, the client’s happy and pays, you then liquidate.  If a year down the line a problem crops up with the property, the legal entity which did the work no longer exists so the customer has little come back against the builder.  Outside the scope of this post, but I believe there are various unions/trade bodies which help the customer in these circumstances…but for the purpose of this post, there’s a reasonable chance that any tax benefits of this tactic will be removed, as most property developers would be on the next project within 2 years.

What about a PAYE job in a similar field?

If you’d asked me a week ago I’d assume you’d be 100% safe.  The consultation talks about doing a similar “trade or activity”.  My understanding was that “activity” was included so as to catch investment businesses as well as trading ones.  However, it seems some believe that it could include someone reverting to PAYE employment in a similar industry too (eg a contractor taking on a permie/umbrella role in the same field).

Another accountant who queried this with the person behind the consultation was told:
(you ask)”whether ‘trade or activity’ includes being in employment. I think that employment will count as carrying on the same or a similar trade or activity. However, as with my comments above, meeting Condition B does not in itself mean that the legislation will apply. Where a person ends their own business and liquidates a company, and goes on to act as an employee for an unconnected third party, it would seem unlikely that Condition C would be met”.

As per my own thoughts on Condition C, I take little comfort in his closing comments, as I think HMRC could easily change their view on this.  I’ve therefore written to the author asking for the rules to confirm that things like PAYE employment would specifically not be at risk (whether he takes any notice is another matter of course).  Last thing I think anyone wants is further uncertainty in the tax world.

18/01/2016 – uninteresting update – Adrian Coates has responded to my consultation comments…but only to say he’ll consider my views together with others.

Summary

Getting an MVL of a redundant, cash rich company will still be a viable, tax efficient method of extracting cash.  You just need to be careful to ensure you do something very different for at least two years following the liquidation.

UPDATE 9 AUGUST 2016

Whilst still not much is set in stone, it seems HMRC have been sending out a standard response to anyone requesting clearance (ie conformation in advance that their situation wouldn’t be caught) regarding this.  See the below PDF:

Distributions in a winding up_Clearance requests

Most significant bit to my mind is last sentence of 1st para on 2nd page:
“Condition C will not be met where the individual is employed by an unconnected third party.”
So situation some people were concerned about is Joe Bloggs does IT development work on a contract basis through Joe Bloggs Ltd.  He then liquidates (with a tidy cash balance) to become an employee doing IT development work for big corp.  Seems crystal clear HMRC are saying they will NOT attack this situation.

Also of interest (to me at least!) are examples 1 & 3.  Both seem to me to be situations the legislation if read broadly could easily be attacked by HMRC.

Eg example 1 – someone running a Ltd Co semi retires, liquidating, but then does the same thing as a sole trader.  I imagine in this case the turnover of the sole trader business would be quite a bit lower than the Ltd Co before it…but still, seems surprising to me HMRC saying this wouldn’t be caught.  I wonder where the line would be drawn, eg if the sole trader business was just as big as the Ltd Co, presumably HMRC wouldn’t be so happy.  Perhaps this example adds more confusion on where boundaries are rather than clarity…but still, it suggests HMRC won’t be too aggressive regarding this anti avoidance rule.