Following consultation by HM Revenue & Customs, a new Targeted Anti-Avoidance Rule (TAAR) has been proposed by the government which will affect the treatment of shareholder distributions in Members Voluntary Liquidations (MVL). This is in response to growing concern that the MVL process is being exploited to create a tax advantage as opposed to being used as a commercial way of closing down a solvent company which is deemed to have no further purpose.
The planned changes are expected to come into force on 6th April 2016 and will greatly impact the way in which shareholder distributions will be treated in a Members’ Voluntary Liquidation.
Under the current rules, a distribution to shareholders in a MVL would be treated as a return on capital and subject to capital gains tax and if applicable, entrepreneurs relief, meaning a lower rate of tax (often as low as 10%) than if the dividends were received outside of a MVL. This is the principal advantage of a MVL and the reason for the recent upward trend in cases.
Under the new proposals, the new TAAR will be applied to certain distributions which would treat them as income which will be charged at rates ranging up to 38.1%. These proposals will affect companies where:
- Within 2 years after the date of winding up, the individual is involved in carrying on any trade or activity previously carried out by the company subject to the MVL. This will cover both trading as a sole proprietor, partnership, new company or LLP.
- The company is a “close company” or has been such a company within the previous 2 years.
- “Special purpose companies” – this relates to a business that is capable of being divided amongst other separate companies each undertaking a particular project. As and when each contract or project is completed, the company is liquidated and the profits and gains of the project are realised in a capital rather than income form.
“Given the significance of these changes, we expect to see a spike in demand for our MVL services in the period leading up to 6th April 2016” explained Stephen Wainwright, Partner.
Should you require any further information about the proposed changes or the MVL process or, indeed, any turnaround or insolvency matter, then please do not hesitate to contact one of our team.