MEMBERS VOLUNTARY LIQUIDATIONS
With effect from 6th April 2016 some of the changes to the Entrepreneurs Relief ("ER") provisions that were made in the Spring 2016 budget could in some cases result in the desirability of opting for the Member Voluntary Liquidation procedure being reduced. HMRC consider that some director/shareholders of small companies have in the past built up assets in their companies with the intention of making a capital distribution in a solvent members voluntary liquidation (“MVL”). By doing this and by using the Entrepreneurs Relief rules as they then stood the shareholders have been able to personally pay only 10% capital gains tax compared with in many cases much higher rates of income tax which would have applied if the cash had been distributed as dividends. HMRC are concerned about the “burning and churning” of companies whereby directors/shareholders use the MVL process to close a company every few years to gain Entrepreneurs Relief, and then shortly afterwards replace it with a new one operating in the same business. I understand that the practice of establishing a new company for each new building project in a series is one of the principal targets of these changes.
The new rules are an attempt to stop relevant shareholders from obtaining this tax advantage. Some shareholders who built up assets as described above may understandably feel aggrieved that the government has targeted people who planned within the prior rules for many years only to find that the rules have changed just before they are due to exit.
The following link leads to HMRC’s own description of their proposals:
Under this legislation a distribution from an MVL winding up will be treated as income where:-
an individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up.
within a period of two years after the distribution, S continues to be involved in a similar trade or activity
the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage.
In order to fall foul of the new legislation all three conditions above must be met. HMRC may look closely in particular at conditions 2 and 3. If for example the individual successfully claims ER, and subsequently sets up a new personal service company in the same trade within 2 years, they will need to be able to demonstrate what their main intention was at the time the MVL process started. It may be possible to persuade HMRC to recognise for example that events often take over, that people can lose or fail to secure employment, and may be forced back into contracting in the same business through a personal service company although this outcome was not the original intention.
Where it can be evidenced that the principal reason for an MVL is retirement, or so that the shareholder can become involved in a different business sector, then there should still be little difficulty in obtaining Entrepreneurs’ Relief.
Owner managers of small companies should seek professional tax advice before starting an MVL wind up process. However, in cases where one or more of the three conditions above do not apply, they should not be afraid of opting for a share buy back or an MVL and seeking to qualify for Entrepreneurs Relief, which can be very valuable particularly when retirement is being contemplated.
This information is written in general terms and cannot be fully comprehensive. Its application to particular circumstances will depend on specific facts. The views and suggestions set out are not intended to constitute professional advice or to be a substitute for specific advice.