Jo White FCA CTA
- Private Client Tax Director
- +44 (0)330 124 1399
- Email Jo[email protected]
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Many entrepreneurs and owner-managed businesses are now considering their future strategies in a COVID-19 era. At the same time, the Government has asked the Office of Tax Simplification to review Capital Gains Tax (CGT). Changes are likely to be announced in the Chancellor’s autumn statement and there is the possibility of CGT and Income Tax rates being aligned. Jo White explains, “The Government has incurred historic levels of spending to help businesses and individuals through the coronavirus pandemic. We know that a review of taxation was likely to follow and Capital Gains Tax, much overlooked in recent years, is an obvious and easy place for government to start. Despite the huge support package that the Government has provided, some business owners therefore may find the speculation of changes to Capital Gains Tax the final nudge to making the decision to “exit” either by closing down or selling their business. Such entrepreneurs should consider the benefits of a Members’ Voluntary Liquidation (MVL).”
An MVL is a formal procedure which is available to solvent companies, perhaps where the owner / manager is retiring or where the profitable business has been sold to another entity. Solvent Liquidations are often undertaken because of the tax benefits which the shareholders can obtain – it is common for distributions received from a Liquidator to be treated as a return of capital subject to Capital Gains Tax rather than taxed as dividends, and in some circumstances, shareholders who are also officers or employees may be able to claim Business Asset Disposal Relief (formally Entrepreneurs’ Relief) which can bring the rate of tax payable on distributions down to 10% on the first £1 million of lifetime gains.
Whilst there are immediate tax benefits of an MVL, where a shareholder is looking to be involved in or set-up a similar business, within 2 years, then specific targeted anti-avoidance rules may apply which could turn a capital payment potentially subject to CGT at 10% to an income payment potentially subject to Income Tax at 38.1%. Understanding what the entrepreneur’s plans are in the future is therefore important before starting the process.
In order to place a company into Liquidation, first the directors hold a board meeting and resolve that the company is solvent and they resolve to convene a meeting of shareholders to ask them to wind up the company. A majority of the directors sign a Declaration of Solvency in front of a solicitor to confirm their view that the company will be able to pay its debts.
The shareholders’ meeting can be held on the same day if the shareholders agree and they then pass resolutions to wind up the company, appoint Liquidators and approve the Liquidators’ fees. As noted above, if shareholders’ consent to short notice cannot be obtained, it will be necessary to provide the statutory notice for a general meeting – usually 14 days. The Liquidator must be a licenced Insolvency Practitioner.
The Insolvency Practitioner would prepare all of the documentation, minutes and resolutions to record these meetings. They would also usually liaise with the company’s accountant to prepare a statement of assets and liabilities which will accompany the Declaration of Solvency.
After the Liquidators are appointed, they take steps to realise the assets of the company (often that is primarily just cash), pay any creditors and distribute the surplus funds to the shareholders. The Liquidators liaise with HM Revenue & Customs and the company’s accountants to ensure that any outstanding returns are filed and they would seek specific clearance from HMRC that there are no further liabilities before they took steps to close the Liquidation.
On the basis that shareholders provide an indemnity in relation to any unanticipated liabilities, a Liquidator could potentially make a first distribution within 7 days following the commencement of the Liquidation. It would be usual for the Liquidator to hold back some funds as a provision although the amount of this provision can be discussed for each individual case.
Once initial information is received from the client and a strategy for dealing with the Liquidation is agreed, the Liquidator will usually seek to agree the basis of his remuneration as a set amount plus disbursements
Whilst the formal process for placing a company into Liquidation can be very quick, there is a benefit to having time to plan the procedure before the Liquidation formally commences. For example, it is advisable that a provision for corporation tax for the cessation period is calculated and paid prior to the Liquidation to avoid unnecessary interest accruing, it is often advisable to move funds prior to the Liquidation to reduce delays in returning money to shareholders, and it may be beneficial for bonds or other investments to be encashed prior to a Liquidation. It may also be necessary to serve prescribed notice periods on stakeholders for example if there is a registered floating charge, or if there are a number of shareholders and their consent to holding meeting at short notice cannot be obtained.
Anyone who wants to achieve an MVL before the Autumn Statement should take action now.
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