On 6 December 2023 HMRC published a bulletin about its decision to cease providing tax clearance in a Members’ Voluntary Liquidation. The bulletin can be found here.
In response to this action by HMRC, the R3 Tax Working Group has produced this note for members. (It should be noted that this is guidance only, it is not a substitute for taking specific advice on the facts of the specific case.)
R3 Tax Working Group
Depending on the facts of the specific case, an Insolvency Practitioner (‘IP’) may consider it useful to do some, or all, of the following in order for them to be comfortable with a company’s tax affairs in a Members’ Voluntary Liquidation (‘MVL’):
Pre-appointment
Pre-appointment, the IP’s firm may be instructed to prepare for the MVL and the firm will obviously need to review and comply with that instruction. As a proposed liquidator, the IP may wish to;
- be comfortable that the accounting records are of sufficient quality to allow all tax filings to be made;
- make enquires of the directors so that, ideally, all tax filings are up to date (across all heads of tax), all outstanding taxes have been paid and there is no HMRC enquiry into any matter (or, at worst, a very clear path to agreeing the issue with HMRC);
- if possible, obtain copies of/review where necessary all elections and filings for pre-appointment periods, such as for instance the need to receive or surrender group relief or the removal of the company from a VAT group (unless the IP may still undertake potentially Vatable intra-group transactions) or senior accounting officer notifications where applicable, so that these can be resolved by the directors prior to the IP’s appointment;
- ensure that tax filings should be filed online wherever possible (as an instant acknowledgment receipt will be generated);
- liaise with the Customer Compliance Manager at HMRC, if there is one, on the company’s tax compliance; and
- simplify the balance sheet of the company as far as possible prior to appointment to ensure that matters that require the company to be a member of a group are dealt with while it remains so (for instance, the release of inter-company debts which, if done post-appointment, may crystallise taxable income in the company in MVL)
Post appointment
Following appointment as Liquidator, the IP (now as the Proper Officer of the company for tax purposes) will probably have at least two periods for which they will need to file corporation tax returns with HMRC, unless the company is already dormant:
- the period ending on the day immediately before their appointment (likely to be a partial period unless the appointment took place on the first day of a new period of account) (which rank as a creditor claim); and
- the period (of up to 12 months) starting on the day of their appointment (which rank as an expense).
If dormant, then the IP should notify HMRC of their appointment and the intention that the company will remain dormant until dissolution. However, to the extent that any activity results in either taxable income or gains (whether or not there is actual tax to pay), the IP will need to file a tax return for the relevant period.
Ideally, pre-appointment tax returns should be filed prior to the liquidation. If this is not the case, the IP may wish to file any pre-appointment tax return as soon as possible after appointment. Once any final activity has been undertaken and the company is ready to pay any final distributions and/or move to dissolution, any cash balances should be removed from interest bearing bank accounts to ensure that there is no source of income. Without a potential source of income or gains, the company will cease to be within the charge to corporation tax and the IP can produce and file a corporation tax return to that date.
In the event that the company is still registered for VAT, any final quarterly returns will need to be submitted and then the Revenue should be notified of the intention to de-register. Equally, if the company had any employees (particularly, although it would be unusual, post-appointment) any payroll tax filings will need to be submitted; note, this may include annual returns that are required for pre-appointment periods.
Finally the IP will need to be satisfied that all other relevant filings have been submitted for the post-appointment period. So, for example, if a broader group was within the senior accounting officer regime pre-appointment, the company will remain in that regime for at least one period post-appointment and the IP will formally need to certify that the company’s accounting records are adequate. There may be other filings required (both in the UK and potentially overseas), particularly for companies that were members of larger multi-national groups.
Once the IP is satisfied that the company is dormant, all tax filings have been made and all relevant taxes been paid for both the pre- and post-appointment periods, they may proceed to notify HMRC of the intention to dissolve the company and exit from office. Reasonable time should be given to HMRC to process any returns before closure as this is likely to reduce the risk of a subsequent enquiry. The IP may wish to send a notice of intended dividend to all potential creditors, including HMRC, to give a final opportunity for it to make a claim.
If everything is in order, HMRC should have no cause to intervene or ask the IPs for any further details. However, in the event that the company is dissolved and HMRC believes that its tax affairs have not been dealt with satisfactorily, then their recourse would be to either apply to restore the company to the Register or to employ secondary liability provisions that they may have at their disposal in a particular situation (against any broader corporate group, the directors, the shareholders or, in very limited circumstances, may theoretically attach to IPs themselves).
Indemnity
An immediate distribution to shareholders is sometimes requested in an MVL and therefore an indemnity is usually requested by the liquidator from every shareholder who receives a distribution. The indemnity acts as a form of protection for the liquidator if it later transpires that there were outstanding liabilities to creditors (including HMRC) and the liquidator needs to recoup monies distributed to members to pay that creditor(s), if required. If a creditor remains unpaid, this can lead to an insolvent liquidation being declared which is not in anyone’s interests, especially the shareholders.
Given the significance of HMRC’s position, it may be prudent for IPs to review their indemnities and seek legal advice should they be concerned with their effectiveness and have any tax filing concerns.
File notes
We suggest that IPs keep comprehensive files notes on their decision to declare a distribution(s) and the work undertaken to ensure the company’s tax filings are complete.
(It should be noted that this is guidance only, it is not a substitute for taking specific advice on the facts of the specific case.)
*NEW ADDITION, 14 December 2023*
On 6 December 2023 HMRC published a bulletin about its decision to cease providing tax clearance in a Members’ Voluntary Liquidation. The bulletin can be found below. For ease of reference, the first section of the bulletin reads as follows –
“As part of a process change, and with immediate effect, HMRC will no longer provide pre and/or post tax clearances in Members’ Voluntary Liquidation (MVL) cases and IPs should now close cases without tax clearance subject to their professional judgement. This means any requests from insolvency practitioners for clearance already received will not be responded to, and any future requests will not be actioned. This will include requests covering all heads of duty and will also cover all insolvency types.”
The title of the bulletin and the final sentence of the above paragraph “This will include requests covering all heads of duty and will also cover all insolvency types.” may have caused some confusion amongst the profession considering the bulletin purports to be about solvent liquidations. We have sought clarification from HMRC, who has confirmed that all clearances, including those related to administrations and other types of insolvency, have ceased.
Furthermore, HMRC has advised that they are in in the process of updating the Public Notice 700/56. The update will include more practical advice, addressing the withdrawal of clearance for MVLs, administrations, and insolvent liquidations whilst offering a comprehensive and transparent understanding of HMRC’s decision in respect of this action.