Chris Thorpe looks at the role that liquidations can play in tax planning and the pitfalls.
Once a business or a limited company has run its course, for whatever reason, the owner needs to decide what happens to it; the company will not automatically die with them. Hopefully, there is a family member who will take over the reins, or maybe a senior employee; or perhaps a larger competitor will take the shares off their hands. But if not, the company will have to die with the owner – and this usually takes the form of a Members’ Voluntary Liquidation (MVL), i.e., a solvent liquidation.
Informal methods
It is possible to strike off a solvent company from the Registrar of Companies informally with the remaining assets going to the shareholders without the need for a liquidator – much quicker, cheaper, and simpler. However, from 2012, only the first £25,000 worth of those assets can go back to the shareholders and be treated as capital distributions for tax purposes – as opposed to distributions chargeable under income tax. One might think that an obvious way to get below this threshold is to declare dividends prior to strike off to reduce the value of the company, but the government has thought of that! Any dividends deemed to be declared in anticipation of the strike off will be included within that £25,000 threshold. So, for all but the smallest companies, an MVL is the only way to go about winding up a company and having the distributions taxed as capital. In fact, it’s so good, that in theory, an owner could liquidate a company, take all the assets, and plough them back into the same business whilst suffering only CGT rather than income tax.
Anti-Avoidance
This notion of ‘phoenixing’, i.e. disposing of an old business with a new, identical one arising from the flames, is nothing new. You can go back to the days of Queen Elizabeth I to find legislation which counters transactions designed to avoid creditors (Fraudulent Conveyances Act 1571). But for the purposes of avoiding income tax on distributions, solvent liquidations had a loophole of their own right up until 2016.
The Targeted Anti-Avoidance provisions of 2016, found in s 396B ITTOIA 2005, state that where a personal company is subject to a solvent liquidation, and within two years thereafter the participator continues with the same or similar trade, then the capital tax treatment will be replaced by income tax treatment of the proceeds from the liquidator. Other than trying to argue the new trade is not the same or similar as the old one, the only defence is to argue that tax avoidance was not the main purpose (or one of the main purposes) behind the disposal and reactivation of the activity.
But what is a ‘same’ or ‘similar’ activity? Who knows? Rather unhelpfully, HMRC will not offer any statutory clearance under the Transaction in Securities Legislation in s 701 ITA 2007 – this is different legislation. The guidance also makes clear that non-statutory clearance is not suitable in this case, and any attempts to ask HMRC for assistance will end with you being directed to their guidance (CTM36325) with four unimaginative examples.
Practical tip
If your clients are planning to sail off into the sunset and never get involved in the same business again, then MVLs are a very useful (although fairly expensive) planning tool, allowing capital treatment of the receipt of the proceeds from the liquidator. However, if they are planning to remain in the business afterwards, or recommence within the next two years, then the 2016 changes will mean that an informal strike off with its income tax treatment above £25,000 is just as effective and much cheaper.
