Are we heading for an economic cliff?

How prepared are you for when the COVID-related financial support and other interim measures fall away? 

With the impact of COVID the Government laid down, what was to become the Corporate Insolvency & Governance Act 2020 (“CIGA”) which became law in June 2020 and had retrospective effect to March 2020.  CIGA was seen as a balancing act between the detrimental impact the severe restrictions would have for trading on one hand against shielding business from depleted cash flow on the other.

In January the House of Lords debated over the continued restrictions on creditor enforcement imposed by CIGA.  These restrictions were intended to expire on 30 September but were extended to 31 December and subsequently 31 March 2021.  In general, the restrictions prevented the service of statutory demands/winding up petitions, landlord enforcement and suspended wrongful trading provisions.  As a result of these restrictions, the latest data suggests an unprecedented level of debt has accrued, including over £4.5 billion in rent arrears.

Furthermore, there is an estimated £70 billion of Government-backed lending, together with deferred tax liabilities, which is most likely going to make HM Revenue & Customs (“HMRC”) a major creditor in most insolvencies, resulting in them having significant influence on the destiny of businesses.  This influence is made all the greater following the upgrading of HMRC to secondary preferential status when formal insolvency is required.

So, what is the good news?

Well, the Government have announced an easing of bounce back loan repayments in an effort to ease cash flow demands.  In addition, recognising the resulting position of HMRC and the detrimental effect COVID has caused generally, the House of Lords have stressed HMRC need to be co-operative and engaging with a supportive approach on proposed COVID-affected corporate restructuring.  Clearly, time will tell on this recommendation and I would say this commercial understanding needs to be wider by including landlords and credit controllers who are all seeking recoveries.

I asked in the title whether we are heading towards an economic cliff.  Personally, I would suggest “Normal” (whatever that is) will not occur over night.  So, rather than a cliff as COVID restrictions ease off, maybe the economy will experience a gradual slope.

Whatever the outcome businesses need to be pro-active.  Review your cash flow and look at ways of reducing overheads, particularly while your turnover gradually starts to return to pre-COVID levels.  You should engage with your creditors and for those who are owed money, a commercial understanding is going to be the order of the day.  If all fails, the advice has to be to seek early advice.  It is no coincidence those who do seek early advice find they have more options available then those who leave it until the last minute.  As a Scout will say, “Be prepared.”

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to or access our website at

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Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

These are solvent liquidations. From the date of the liquidation the shareholders are entitled to receive the value of the net assets of the company (i.e the company owes them the relevant value). At the same time the shareholders owe the company the amount of their overdrawn loan accounts.

The shareholders could therefore repay the company the full amount that they owe, in which case they will be entitled to receive the full amount of the value of the net assets as a capital distribution.

Otherwise, they can set off the value of the assets due to them against their debt (the balance of the loan account) and only withdraw, in cash, the net amount.

Where the two debts (company debt to shareholder and shareholder debt to company) are set off in this way, this will constitute a repayment of the loan account for the purposes of relief under CTA10/S458. This is because where a creditor accepts something of equal value, the debt is discharged by satisfaction not by release. There is therefore no question of ITTOIA05/S415 applying.

It is well-established that where a sum is owed by one party to a second party and another sum is owed by the second party to the first, both debts may be cleared by means of a set-off and that is exactly the same as if both sums had actually been paid/repaid.


A participator owed the company £1,425,000 by 30 May 2017. The company went into Members Voluntary Liquidation on 1 June 2017. The net assets, including the overdrawn loan account totalled £5,300,000.

On 1 June 2017 the liquidators declared an interim distribution in the liquidation of £1,425,000 per £1 ordinary share, giving a total distribution at that date of £1,425,000. This was not paid out in cash to the shareholder but was credited to his loan account. It would be a capital distribution within TCGA92/S122. This is not a release of the loan, it is a repayment of the loan. There can be no charge under ITTOIA05/S415.

Likewise any further distributions in the liquidation up to the total balance of the net assets will also be capital distributions.

Are Members’ Voluntary Liquidations (MVLs) under attack again?

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.

Statutory Interest on Corporation Tax in Solvent Liquidations

This blog is for accountants, tax advisors and directors who are considering a solvent liquidation, commonly referred to as a Members’ Voluntary Liquidation or MVL.

During the course of 2017 we have been informed of what appears to be a change of policy by HMRC in respect of statutory interest on Corporation Tax. HMRC now require the payment of statutory interest at 8% from the commencement of the liquidation on any CT that falls due for payment after that date, even if the normal due date for payment of the tax is not until after the commencement of the liquidation, and payment is made before the normal due date.

HMRC are relying on a decision in one of the Lehman’s cases for this change in policy. That case indicated that statutory interest was due on both future debts and contingent debts, and since CT payable on a normal due date after the commencement of a liquidation is a future debt then statutory interest falls due. Whilst that judgement related to an administration, HMRC are arguing that in view of the similarity in wording in the legislation it applies equally to liquidations.  The standard letter that they are sending to liquidators with demand for statutory interest says:

“Our understanding of the correct treatment of statutory interest derives from the decision of David Richards J in Re Lehman Brothers International (Europe) : Lomas v Burlington Loan Management Limited. In a supplemental decision he restates his conclusion that “interest under Rule 2.88 (statutory interest) is payable on future debts and on the amount admitted to proof in respect of contingent debts from the date on which the administration commenced”.

Rule 2.88 mirrors Rules 14.23 which applies to a winding up. We are also assuming that will also apply to others taxes, VAT, PAYE and NIC etc.

To make matter worse it is clear that HMRC themselves don’t understand or haven’t been made aware of the change of policy and so we are aware of cases where we have paid the statutory interest and it has been paid back to us. The current advice is to pay the CT to the normal office but send the statutory interest to HMRC’s MVL team!

Therefore if you are considering a solvent liquidation further planning will be required to calculate and more importantly pay any tax debts at the commencement of the liquidation or as soon as possible thereafter in order to minimise statutory interest.

Gavin Bates specialises in solvent liquidations, commenting on the change Gavin said:

“This is effectively a hidden tax on entrepreneurs since HMRC are receiving interest that would not be due other than for the decision to cease trading to permit the members to extract their capital from the company. I also find it very unfair that we have no notice of this change of policy.  I often sit with directors many months before my appointment as liquidator in order to plan the process so we will now need to calculate and pay the tax debts as well as many other factors which we work through”

If you wish to discuss this further please feel free to contact us for an initial free meeting which are confidential and impartial.

Solvent Liquidation – What is it and who can use it?

We are often asked ‘what is solvent liquidation’ and ‘is it suitable for me’? In this video, Gavin Bates, one of our licensed insolvency practitioners explains the meaning of solvent liquidation and gives some clear examples of when it can be used, what it is used for and what you can expect should you decide it is for you.

Solvent liquidation is not suitable if you are in difficulties financially. Please see our other videos for solutions to financial problems.