Members Voluntary Liquidations (MVL) are under scrutiny from HM Revenue and Customs following the government’s concerns that some people are structuring their business affairs purely to take advantage of lower tax rates.
A MVL is the liquidation of a company that is solvent, i.e. it has assets sufficient enough to settle all liabilities in full plus statutory interest. The decision to instigate an MVL is generally because the company has no further purpose and it is a tax efficient way of distributing its assets and profits to the shareholders.
However a consultation document has now been issued by HM Revenue & Customs that focuses on certain areas of tax planning, including:
• Moneyboxing - Company shareholders retain profits that are in excess of the commercial needs and so receive these profits as capital when the company is finally liquidated.
• Phoenixism – A company enters into a MVL and a new company is set up to replace the old and carry on the same activities. The shareholder receives all of the value of the company in a capital form while the trade continues.
• Special purpose companies - The operations of a business are capable of being divided among separate companies, each undertaking a particular project. As each project finishes the company is liquidated and the profits of that project are realised in a capital rather than income form.
The consultation document states that a new Targeted Anti-Avoidance Rule will come into power that will address these issues. The Rule would treat a distribution from a winding-up as if it were an income distribution, where:
• An individual who is a shareholder in a close company receives from that company a distribution in respect of shares in a winding-up.
• Within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity.
• The arrangements have a main purpose of obtaining a tax advantage.
The consultation will run until 3rd February 2016, with the new draft legislation expected to be part of Finance Act 2016 and to apply from 6th April 2016. Therefore a company would need to be in Liquidation by 10th February 2016 to give it the best chance to have the distribution made before 6th April 2016. However there are no guarantees regarding distribution as this dependent on how quickly the banks act.
If you would like to find out more about the benefits of an MVL before there are changes in the legislation, we can help you start the process now.
For more information, please contact us on 0114 267 0911 or email email@example.com