This is a short overview of the potential impact of HMRC’s new policy regarding tax clearance in Members’ Voluntary Liquidations…
Setting the scene
- HMRC tax clearance was a process where HMRC confirmed a company’s tax affairs were in order, and the company had no outstanding tax debts / issues, enabling the Liquidator to pay shareholder distributions and then close the liquidation without any potential for any comeback from what can often be a major creditor.
- This clearance was almost always obtained by liquidators to protect themselves and others, such as the shareholders by reason of guarantees given to return money should unexpected creditor claims arrive.
- From December 6 2023, HMRC discontinued providing liquidators with tax clearance.
Why was HMRC Tax Clearance Abolished?
- The process had no statutory basis and was mainly for the Liquidator’s comfort.
- It used to involve multiple letters and often caused delays in the conduct of MVLs, particularly as regards the distribution of funds/assets and the closure of the liquidation.
- Recent changes within HMRC streamlined the process, but it was completely abolished in December 2023.
What’s the impact of HMRC Abolishing Tax Clearance?
- Pros: MVLs could peotentially be completed faster no there is no HMRC clearance.
- Cons: Directors and their accountants will need to provide more evidence that the company’s tax affairs are in order. Liquidators will be requesting a lot more information from directors and the company accountants, including:
– The last three sets of financial statements and tax returns.
– Proof of tax registrations and closures of schemes.
– Confirmation of no involvement in tax avoidance schemes.
– Statements showing the closing tax position and tax payments.
– Cessation accounts and 12 months of bank statements.
So What Will Be Happening Now that HMRC Is Not Providing Tax Clearance?
- Some directors will have to carry out a fuller enquiry than they might otherwise into the company’s tax affairs, incurring more costs with the company accountants, in order to be able to properly swear the Declaration of Solvency and demonstrate to the proposed liquidator that all tax matters have been considered.
- Liquidators, the company accountants, directors, and shareholders will have to work more closely together to ensure the winding up is carried out efficiently and nothing is missed as regards tax.
- Liquidators will seek longer, in terms of their duration, guarantees from shareholders for ‘early’ distributions. Those guarantees will continue to exist until the strike off of the company.
In summary, shareholders with well-organised tax affairs could receive capital distributions faster in MVLs, while those with badly-organised tax affairs will see delays and the costs of the process as a whole increase.