21st December 2015

HMRC has published a new consultation paper on company distributions which could significantly increase the tax payable by shareholders on distributions in a Members Voluntary Liquidation.

The general rule in tax law currently allows individual shareholders to receive a distribution in a winding up at the same rate as the Capital Gains Tax rate which can be as low as 10% (if Entrepreneurs’ Relief is available) and will be a maximum of 28%.

Under the new proposals, distributions will generally be charged to Income Tax, with basic rate tax payers paying 7.5% on their distributions, 32.5% for higher rate band tax payers and 38.1% for those within the additional rate band.

The new proposals will apply if any of three conditions are met, which are broadly as follows: –

  • “Moneyboxing” – where the shareholders of the company retain profits in excess of the company’s commercial needs in order to receive these profits as capital when the company is liquidated
  • “Phoenixism”, where a company enters into a members’ voluntary liquidation and a new company is set up to replace the old and carry on the same, or substantially the same, activities. The shareholder here receives all of the value of the company in a capital form while the trade continues – albeit now in the new company – exactly as before; and
  •  “Special purpose companies”, where the operations of a business are capable of being divided among separate companies, each undertaking a particular project. The common example here is where SPV’s are set up to develop, build and sell say a block of flats. As each project or contract comes to an end, the SPV company is liquidated and the profits and gains of that project are realised in a capital rather than income form.

The consultation period will run until 3 February 2016 and the new draft legislation is expected to be part of Finance Act 2016 and to apply from 6 April 2016  regardless of whether the liquidation commences before or after that date.

In view of the above, you might wish to make your clients aware of the proposed changes and to consider getting their financial affairs in order to place their company into Members Voluntary Liquidation to take advantage of the current tax regime on distributions before the new tax laws potentially come into effect.

Should you need any assistance in placing any of your clients’ companies into Members Voluntary Liquidation, KRE would be pleased to offer free no obligation advice and can meet to discuss your clients’ needs at a date and venue of your clients’ convenience.