This Technical Alert contains a number of important tax updates and messages from HMRC, Including:

1- R3 Update to members regarding MVL statutory interest in England and Wales.

2- R3 Update to members regarding changes to statutory interest in MVLs following the introduction of the new Insolvency Rules in Scotland.

3- HMRC note to members regarding MVL statutory interest in Scotland.

4- Guidance note issued by Counter Avoidance, HMRC, re Follower Notices in Insolvency.

5- HMRC consultation and R3 member survey – secondary preferential creditor status.

6- Change to HMRC .gsi email addresses

If you have any queries regarding any of the matters raised please do not hesitate to contact R3 Technical and Education Director, caroline.sumner@r3.org.uk

1. HMRC and claims for statutory interest in members’ voluntary liquidations (“MVLs”) (England and Wales)

This is a follow up to the Technical Alert issued on 21st December 2017, and R3 guidance issued February 2018, concerning HMRC’s clear change of approach in requesting the payment of statutory interest (“SI”) at the rate of 8% on all claims for tax due from the date of the winding up (including the final corporation tax return falling due nine months and one day after the commencement of the winding up).

Our discussions with HMRC in this regard are on-going and we continue to put forward the issues members are facing, as a consequence of this change of approach, to HMRC. We are continuing to seek written confirmation that HMRC will not seek to re-open closed MVL cases where statutory interest has not been paid on HMRC claims and we continue to request further guidance from HMRC in response to the concerns raised by R3 as to the application of the change in HMRC’s approach (raised initially in 2017). We are also aware that the treatment of statutory interest is different in Scotland and that HMRC have taken a different approach therefore to Scottish cases and have issued separate guidance in this regard.

We have been made aware by members that HMRC have recently commenced issuing letters to IPs with open MVLs, pre-dating HMRC’s guidance issued February 2018, requesting payment of outstanding statutory interest, or, if payment of the statutory interest is not possible, then an explanation as to why the MVL has not been moved to a creditors’ voluntary liquidation (“CVL”) under s95 IA ’86. As previously advised, R3 is not able to provide case specific tax or legal advice and members are still recommended to seek their own professional guidance in this regard. However, as HMRC have not produced further formal written guidance on the position on cases which remained open at the time HMRC issued their guidance and given the recent letters being sent to members, R3 has consulted with members with a view to suggesting additional practical steps to consider taking with regards to affected cases. Please note that until formal written guidance is issued by HMRC whilst these practices are considered acceptable to mitigate any interest arising, members should remain cautious.

It is clear from the Insolvency Rules that statutory interest is payable in an MVL on all debts outstanding at the commencement of the winding up, and this applies to debts due to HMRC.

Members are encouraged to open a dialogue directly with HMRC to discuss issues arising from this change in approach and to share with R3 any guidance provided by HMRC directly as to what further action should be taken.

SI due to HMRC should be calculated in accordance with the legislation (see previous Technical Alert).

Where funds are available the SI should be paid to HMRC.

Where funds are not available to make payment of SI due to HMRC the options available to the IP will depend on whether funds have been distributed to shareholders or not and whether such funds would have been sufficient to cover the SI due in full.

Where funds would have been available to pay the SI due to HMRC, but such funds have been distributed to the shareholders instead, a move to CVL under s95 may not be considered appropriate if it is possible to recover the payments from shareholders and pay the SI to HMRC. In these cases IPs should take legal advice as to the steps available to recover the relevant funds from shareholders to enable a payment to be made to HMRC instead.

Members are advised to open a dialogue with the relevant shareholders of the company to explain that a change in approach by HMRC has resulted in an overpayment being made to shareholders and therefore you will need to submit a formal request to shareholders for repayment of the amount payable to HMRC (in accordance with the shareholders’ rights on the shares).

Members should keep contemporaneous notes of all decisions made and steps taken in this regard.

In the scenario where shareholders are not understanding of the change of approach and do not repay an amount, members are encouraged to make contact with HMRC and R3, so we can compile information to demonstrate to HMRC the efforts members are going to following this change.

Where funds have not been distributed to shareholders, or those funds distributed are insufficient to settle the SI due or cannot be recovered, then IPs should consider whether a conversion to CVL would be appropriate and, if necessary, take legal advice.

We will continue our dialogue with HMRC in this regard, particularly to demonstrate that there has been a change in approach adopted by HMRC. Should members have any evidence to show this change in approach has occurred please do contact carolinesumner@r3.org.uk as such evidence will support our discussions. Technical Alert dated 21st December 2017 http://r3–mail.org.uk/t/133C–5CYWS–C35DRMLMAB/cr.aspx

2. HMRC and claims for statutory interest in members’ voluntary liquidations (“MVLs”) (Scotland)

This is a follow up to the Technical Alert issued on 21st December 2017, and R3 guidance issued February 2018, concerning HMRC’s clear change of approach in requesting the payment of statutory interest (“SI”) at the rate of 8% on all claims for tax due at the date of the winding up (including the final corporation tax return falling due nine months and one day after the commencement of the winding up).

Following concerns raised by R3 and others HMRC concluded that their initial interpretations of the Insolvency Act 1986 and Insolvency (Scotland) Rules 1986 were incorrect. HMRC concluded that the legislation in Scotland provides no rate of SI for MVLs and that the SI payable is at the rate of interest which would otherwise be applicable had the company not entered into liquidation. Any member who had made any other such payment based on HMRC’s initial guidance was encouraged to contact HMRC direct for a refund.

It was also clarified that the discounting rules for future payments (R14.44) which applied in England and Wales also did not apply in Scottish MVLs.

Members should be aware however that this position will change following the introduction of the new Scottish Insolvency Rules.

Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 will take effect on 6 April 2019. The effect of these Rules is to apply SI to MVLs in Scotland from this date. Members should be aware that there are currently no transitional periods with respect to these provisions so they will apply to all MVLs which remain open at 6 April 2019, or which are commenced after this date.

We would recommend that IPs undertake an urgent review of their MVL appointments and where cases cannot be closed prior to 6 April 2019 full provision of SI on all provable tax debts at the commencement of the liquidation is made. Consideration should be given to moving to creditors’ voluntary liquidation where the payment of SI renders the company technically insolvent.

R3 is calling for transitional provisions to be introduced urgently whereby SI will only apply to cases commenced after 6 April 2019.

HMRC have issued a further note with respect to MVL and the introduction of the new Scottish Insolvency Rules which is replicated here:

3. HMRC, Members’ Voluntary Liquidation (MVL) in Scotland and the new Rules

Introduction

In November 2018 HMRC issued a note clarifying its interpretation of relevant legislation about Members’ Voluntary Liquidation (MVL) in Scotland. With the introduction of the Insolvency (Scotland) (Receivership and Winding up) Rules 2018 (“ISRWUR”) on 6 April 2019 this note updates HMRC’s view.

References are to legislation are as they are expected to be on 6 April 2019:

• Insolvency Act 1986 (“the Act”) and
• Insolvency (Scotland) (Receivership and Winding up) Rules 2018 (“ISRWUR”)

Declaration of solvency

Section 89 of the Act will continue to apply in Scotland. A company’s directors are required to make a declaration of solvency expressing the opinion that the company will be able to pay its debts in full, together with interest at the official rate within 12 months from the commencement of the winding up.

Interest

HMRC’s note in November 2018 acknowledged the lacuna that Rule 4.66 of the Insolvency (Scotland) Rules 1986 (“the 1986 Rules”) is not noted in Schedule 2 to those Rules. In consequence, the 1986 Rules do not provide for an official rate payable to creditors in an MVL. With the introduction of ISRWUR the position will change.

Part 3 ISRWUR is about MVL. The Note at the head of Chapter 1 of Part 3 ISRWUR makes it clear the “official rate” of interest mentioned in the directors’ declaration of solvency is the rate of interest specified in Rule 7.26 ISRWUR. At the time of writing this rate is 8% and HMRC will expect interest to be paid at this rate in any MVL which is in progress on 6 April 2019. This interest will be payable from the date of commencement of the MVL.

Discounting future debts

HMRC’s note in November 2018 pointed out that Rule 4.16E of the 1986 Rules was not applied by Schedule 2 to those Rules. This meant that debts payable after the date of MVL might not be discounted but ought to be paid in full, even if payment was being made before the due date for payment. With the introduction of ISRWUR the position will change.

Rule 7.1 ISRWUR tells us Part 7 applies in winding up and so applies to MVL. Rule 7.22 provides that a debt payable after the date of liquidation is to be treated as if it were payable on the date of liquidation. The debt is to be discounted from the date for payment to the date of liquidation. The rate at which the discount is to be calculated is the official rate (currently 8%). HMRC will apply Rule 7.22 when making claims.

Transitional provisions

The transitional provisions in ISRWUR are such that the new Rules will apply to all MVLs in progress on 6 April 2019.

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Please Note: MVL work is currently in the process of being migrated to our Newcastle office. This process should be completed by 06 April, and we appreciate your patience while this is ongoing. The address that should be used to contact the MVL team with effect from 06 April is:

HM Revenue & Customs

Debt Management EIS Newcastle DMB 501 BX5 5AB

Technical Alert dated 21st December 2017

http://r3–mail.org.uk/t/133C–5CYWS–C35DRMLMAB/cr.aspx

4. Guidance note issued by Counter Avoidance, HMRC, re Follower Notices in Insolvency.

Follower Notices in Insolvency

The Finance Act 2014 sections 199-218 provides HMRC with the power to issue a Follower Notice to taxpayers in circumstances where the taxpayer is:

• either subject to an enquiry into their tax return or claim: or
• has appealed against an assessment or amendment in relation to a tax advantage which it is claimed arises from certain arrangements; and
• the return, claim or appeal is made on the basis that a tax advantage arises from arrangements and
• there has been a judicial ruling which HMRC considers if applied to the tax payer’s arrangements would deny the tax advantage.

The Follower Notice gives the tax payer 90 days within which to take corrective action – this can be achieved by amending the return or claim to remove the claimed tax advantage or by withdrawing the appeal and entering into an agreement with HMRC to settle. If the taxpayer does not take such corrective action within 90 days then they will become subject to a penalty, the penalty being up to 50% of the claimed tax advantage.

HMRC must issue a Follower Notice within 12 months of the judicial ruling, and in practice this means that notices are issued in batches to all users who have used a particular scheme for whom HMRC consider it appropriate to issue a notice. Insolvency Practitioners have received such notices for taxpayers who are now in a formal insolvency process.

As mentioned above, the follower notice is intended to encourage the recipient to take corrective action otherwise they risk a significant penalty. In insolvency cases this will not incentivise corrective action in the way intended by the legislation because:-

a) The penalty will fall upon the insolvent estate which is held for the benefit of the insolvent’s creditors and not for the benefit of those who actually participated in or were responsible for the avoidance; and

b) Those currently responsible for the affairs of the insolvent entity (the Officeholder) do not have first-hand knowledge of the insolvent’s affairs.

Any penalty is therefore unlikely to ever be paid in an insolvency case and to the extent it is, this will dilute the distribution to other creditors rather than impact those who actually participated in the avoidance. HMRC will not, as a matter of course issue Follower Notices to either individual or corporate taxpayers who are in a formal insolvency process, unless there are reasons to do so.

Where a practitioner has received such a notice, they should contact the Counter-Avoidance Insolvency team on

c-a.counteravoidanceinsolvencyexternal@hmrc.gov.uk to discuss how to proceed. We expect instances where corrective action needs to be taken in Insolvency to be extremely rare. In the vast majority of cases there will be an underlying tax charge which will be a provable debt in the insolvency. This includes any penalties that have arisen as a result of a follower notice issued prior to an insolvency.

R3 message to members

R3 has been involved in protracted discussions with HMRC regarding the treatment of Accelerated Payment Notices (“APNs”) and Follower Notices in an insolvency scenario, and the expectations of HMRC as to the response of an IP to the receipt of an APN or follower notice.

An APN is a requirement to pay an amount on account of tax or National Insurance Contributions. Legislation is found in the Finance Act 2014 and allows HMRC to issue a

‘Notice to Pay’ to any taxpayer for whom there is an open enquiry, or matter under appeal, and who has claimed a tax advantage by the use of arrangements that either fall to be disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) requirements or, following an opinion of the GAAR Advisory Panel, have been deemed not to be reasonable in the circumstances. The notice requires the tax payer to pay the tax in dispute within 90 days, or a further 30 days where the taxpayer requests that HMRC should reconsider the amount of the payment notice. Accelerated payment notices cannot be repealed and penalties may be applied for late payment. Follower Notices may be appealed.

Both Follower Notices and APNs are equally applicable to individuals and corporate entities.

R3 first requested HMRC produce written guidance for IPs following the Talking Heads presentation ‘Guidance to Insolvency Professionals: Recognising and dealing with potential tax avoidance’ which was aired February 2017 and we are disappointed that, despite taking a long time to produce, the guidance covers few of the areas under discussion.

Members should be aware that we are continuing to seek further guidance on the following matters:

• Although the legislation quoted in the first sentence of the HMRC paper includes APNs as well as follower notices, this paper seems to imply that it only applies to Follower Notices.
• The final paragraph states that this note may not apply where ‘corrective action needs to be taken’ and it is considered that this will be ‘extremely rare’. We consider that further guidance is required as to when penalties will be issued.
• The note only covers situations where a Follower Notice is issued after the commencement of the insolvency procedure. We are calling for HMRC to confirm that a penalty will not be issued where a notice has been issued pre-insolvency but that the 90 day period falls after this date.
• We are seeking confirmation from HMRC that they accept that, regardless of whether an APN or Follower Notice is issued pre or post insolvency, the tax and any penalty should be treated as an unsecured creditor in accordance with Nortel principles, rather than as an expense of the insolvency procedure.
• No guidance has been issued by HMRC to bankrupts with regards to the issuing of APNs and follower notices, particularly as the IP cannot (and should not) issue a revised tax return where a Follower Notice is issued post-bankruptcy, causing penalties to automatically arise.
• Clarification as to whether an APN would or could be used as the basis for a bankruptcy petition.
• We are seeking clarification as to how these measures will interact with the proposed re-introduction of HMRC preferential creditor status.

5. HMRC – Protecting your taxes in insolvency

The Government announced in the Autumn budget 2018 that it will introduce legislation in the Finance Bill 2019-20 to make HMRC a secondary preferential creditor for taxes paid by the employees and customers. This means that HMRC will move ahead of holders of floating charges and other non-preferential creditors, but remain behind holders of fixed charges and higher ranking preferential creditors.

This measure is aimed at protecting the payment of tax debts for PAYE (including student loan repayments), NIC (employee contributions only), CIS and VAT that are due at the commencement of the insolvency.

It is not proposed to introduce any time limit in respect of debts that are due. HMRC have issued a consultation on the proposed measures which can be found:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_da ta/file/781323/Protecting_your_taxes_in_insolvency.pdf

The closing date for the consultation is 27th May 2019. R3 will be submitting a response, if you would like your views to be heard please do contact caroline.sumner@r3.org.uk or respond to the consultation directly.

R3 have issued a member survey on the return of Crown Preference to collate our member’s views. Please do let us have your views by completing the survey which can be found www.surveymonkey.co.uk/r/R3CrownPref19 .

6. Change to HMRC .gsi email addresses

Members are reminded that, with effect from 31 March 2019, the “GSI” element of any HMRC email addresses, including any mailboxes, will be removed.

There will be a transitional period whereby emails sent with “GSI” included will still reach the intended recipient, however it would be prudent for members to amend any HMRC contacts they currently use by 31 March 2019.