A couple of years ago, the Finance Act 2016 introduced a new anti-avoidance rule which targeted MVLs to counter ‘phoenixism’ – starting a new business soon after winding up the previous one. This was to stop what was seen as an abuse of Entrepreneurs’ Relief.
More recently we have seen HMRC now demand statutory interest on tax liabilities from the date of the solvent liquidation even though, in the case of Corporation Tax, these tax liabilities are not technically due until 9 months later.
The latest attack is that HMRC are running a test case to challenge the approach of distributing overdrawn directors’ loan accounts in specie and reclassify the distribution as income, rather than capital, and therefore claim more tax.
It has been common practice to distribute overdrawn directors’ loan accounts in specie to save the directors having to repay the loans back to the liquidator and then wait for a distribution back to them as shareholders. In the vast majority of cases the director and shareholder are the same person or husband and wife.
It is also our experience when the Company is brought to an end that directors will dip into Company funds before appointing a liquidator, thereby leading to an overdrawn director’s loan account.
We have spoken to both tax advisors and compliance firms within the insolvency world and currently what is certain is that there is uncertainty. However what is certain is that Schedule 11 of the Finance (No 2) Act 2017 seems to put an end to the approach going forward where the loan is not repaid before 5 April 2019.
As always as with any MVL it is now more important than ever to meet with your accountant and an insolvency practitioner before you bring the Company to a close to avoid any of the common pitfalls.
As always, PBC offers free initial meetings which are confidential and impartial.