Tax Changes Affecting Your Suitability for a Solvent Liquidation
As at 6 April 2016, changes brought about by the Finance Bill 2016 have been implemented to prevent tax avoidance by shareholders of companies utilising the solvent liquidation process to obtain a tax advantage. HM Revenue & Customs consider that utilising the solvent liquidation process just to obtain a tax advantage as exploitation of the liquidation system and have therefore put systems in place to prevent this. The tax advantage is, of course, to apply entrepreneurs relief on capital distributions of profits to members in the liquidation and to pay only 10% tax, as opposed to paying the full dividend rate which applies to them.
As a result, the insolvency profession was inundated with solvent liquidation cases in the early part of this year, all with that deadline of 5 April 2016 in mind. With that deadline now having passed, accompanied by many an Insolvency Practitioner both sighing with relief and simultaneously crying with dismay at the dip in work, business owners and tax advisers will be searching for alternative tax saving options, now that this mechanism has been removed, save for in certain circumstances.
To elaborate, HM Revenue & Customs have advised that the liquidation process may not be utilised in the following circumstances:
When an individual who is a shareholder in a close company receives –
- A distribution from the company in respect of shares in a winding-up;
- Within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity; and
- The arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.
HM Revenue & Customs does not consider the above types of cases as being genuine circumstances of where a business needs to close down, as opposed to just saving tax. This system prevents the ‘phoenix’ situation whereby shareholders just shut down and start over doing the same thing, having removed all of their cash at a low tax rate.
The above changes coincide with the increase in dividend rates, and this of course was designed to prevent increased use of the liquidation process to avoid these increased taxes.
Those that need to remove cash from their business will need to ensure that they approach their tax advisors and utilise their guidance to ensure their tax planning is effective.
Should you wish to discuss the solvent liquidation of your company, please do not hesitate to give me a call.
Keely Edwards MIPA, Senior Administrator
