Creditors have for a long time been entitled to statutory interest at eight per cent on their claims in a liquidation. For solvent Members Voluntary Liquidations, (MVLs), this acts as an incentive to either pay all creditors prior to the liquidation or ASAP following the liquidation.
Corporation Tax (CT) has always been slightly different for the following reasons:
- A final CT return is required to be filed for the period up to the day of liquidation which cannot be filed or accurately calculated prior to the liquidation.
- Payment of CT is normally due nine months and one day from the end of the relevant accounting period.
Therefore if a company was placed into liquidation on 31 January 2017, the due date for the payment of CT on the final pre-liquidation period profits would ordinarily be 1 November 2017, being nine months and one day post liquidation.
Liquidators have historically not paid interest on the final pre-liquidation period CT so long as the liability was paid before that normal due date.
A recent judgment in the matter of Lehman Brothers International (Europe): Lomas v Burlington Loan Management Ltd states that statutory interest is payable from the date of insolvency even where payment of the debt is not yet due. The judgment itself related to an Administration rather than a Liquidation, however, the guidance we have received suggests it is also applicable in a Liquidation.
HM Revenue & Customs (HMRC) are already writing to us requesting statutory interest on their unpaid claims.
What does this mean for a client whose company is already in MVL?
The impact will vary depending on the circumstances of the company being wound-up. For many MVLs a CT600 will have been filed pre-liquidation to the date of cessation of trading. So long as the associated liability was paid pre-liquidation, the residual CT liability will often only arise on bank interest received in the period between cessation and liquidation. Given current interest rates, the CT liability will likely be immaterial, however, this might present a problem where profits were made right up until liquidation.
For companies already in liquidation where we discharged the CT liability post liquidation but before receiving this advice, we are seeking clearance from HMRC without the payment of interest and do not currently anticipate they will seek to apply the ruling retrospectively.
What does this mean for a client whose company is about to go into MVL?
Where the CT liability on the final pre-liquidation period is expected to be material we would suggest either of the following courses of action to minimise any liability for interest:
- File the CT600 to the date of liquidation ASAP post liquidation so the Liquidator can discharge the liability before too much interest accrues.
- Consider a pre-liquidation payment to the company’s CT account for a generous estimate of the terminal CT liability. That way the filing of the final CT600 will result in a small refund with interest payable to the company.
It is clear that HMRC are attempting to levy a hidden tax on entrepreneurs. We see no reason why this should deter your clients from using this tax efficient process as a way of realising the capital from their companies. With a bit of planning, the effects of this ruling can be mitigated or even avoided.
If you would like more information on MVLs, please contact Lynn Gibson of Gibson Hewitt today on 01932 336149 or email email@example.com.