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Important Changes to Members’ Voluntary Liquidation and Capital Distributions

Important Changes to Members’ Voluntary Liquidation and Capital Distributions


Over the last 3 years or so corporate recovery and insolvency has been very quiet. I appreciate not many people will be too disappointed by this news. However, during the same period, we have experienced an upturn in Members’ Voluntary Liquidations (MVL’s) or solvent liquidations.

It is our experience these assignments can be broken down into 3 categories;

  • One Person Consultancy Companies. In the main these have been set up since the recession by people who were made redundant but had a skill set that was required but not on a full-time basis. It is common these individuals are returning to full-time employment.
  • Property Development Companies. Again these companies build out projects before or during the recession and have been waiting for property values to return before selling up.
  • Baby boom generation. We are seeing a number of directors in their late 50’s and early 60’s who just want to stop but there is no succession.

HMRC issued a consultancy document on 9 December regarding Company distributions. The proposed legislation would;

  • Amend the Transactions in Securities legislation, which is designed to prevent unfair tax advantage in certain circumstances. The amendments would strengthen these rules and clarify certain areas; and
  • Introduce a new Targeted Anti-Avoidance Rule, which would prevent some distributions in a winding-up being taxed as capital, where certain conditions are met and there is an intention to gain a tax advantage.

As we are aware in terms of a Company the directors (who in most SME cases are also the shareholders) can extract profits in 3 main ways; remuneration, dividends or a capital distribution. The taxation of each option is different with a capital distribution being the most tax efficient and, if the circumstances allow entrepreneurs’ relief can reduce the rate to 10%.

From April 2016 the dividend tax rate is changing and, therefore, the Government is concerned that the attractiveness of lower rates of CGT may encourage individuals to structure their affairs mainly to benefit from lower tax rates. Three examples given in the consultation document are;

  • “Moneyboxing”, where the shareholders of a company retain profits in excess of the company’s commercial needs and so receive these profits as capital when the company is eventually liquidated;
  • “Phoenixism”, where a company enters into an MVL and a new company is set up to replace the old and carry on the same, or substantially the same, activities. The shareholder here receives all of the value of the company in a capital form while the trade continues – albeit now in the new company – exactly as before; and
  • “Special purpose companies”, where the operations of a business are capable of being divided among separate companies, each undertaking a particular project. As each project or contract comes to an end, the company is liquidated and the profits and gains of that project are realised in a capital rather than income form.

In terms of MVL’s the Government will tighten the existing ‘Transactions in securities’ rules and will introduce a new Targeted Anti-Avoidance Rule (TAAR) that would apply to certain distributions from a winding-up. TAAR would treat a distribution from a winding-up as if it were an income distribution where;

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

It is our understanding that the new rules will only apply on distributions on or after 6 April 2016 and therefore if you are already considering a MVL you need to act quickly in order to allow a distribution to occur before this date.

It is common for insolvency practitioners to offer their services on MVLs for a fixed fee but shareholders should take considerable care as there are some firms offering on-line MVLs at highly discounted prices where you will not even see the insolvency practitioner.  We would question whether you are prepared to take significant financial decisions without attending your professional advisors?

PBC Business Recovery have many years of assisting companies with solvent liquidation. We offer free initial advice and a swift and professional service to both intermediaries and clients alike.


This article was first published in Business Times, February 2016 issue.