Statutory Interest on Corporation Tax in Members Voluntary Liquidations ("MVLs")

Statutory Interest on Corporation Tax in MVLs

Most of you will be aware of HMRC requiring statutory interest on Corporation Tax (“CT”) where it is paid after the normal due date (rather than just their normal late payment interest of 3%), due to the company being in an MVL. It would now appear that HMRC policy has in fact extended beyond that with significant implications for current and future MVLs. HMRC now require the payment of statutory interest at 8% from the commencement of the liquidation on any CT due that falls due for payment after that date, even if the normal due date for payment of the tax is not until after the commencement of the liquidation, and payment is made before the normal due date.

HMRC are relying on a decision in one of the Lehman’s cases for this change in policy. That case indicated that statutory interest was due on both future debts and contingent debts, and since CT payable on a normal due date after the commencement of a liquidation is a future debt, then statutory interest falls due. While that judgement related to an Administration, HMRC are arguing that in view of the similarity in wording in the legislation then it applies equally to liquidations including MVL’s.

This is effectively a hidden tax on entrepreneurs since HMRC are receiving interest that would not be due other than for the decision to cease trading to permit the members to extract their capital from the company. Our Insolvency trade body R3 are aware of this change and are in contact with HMRC about it, but it is likely to require a Court decision in an MVL to make HMRC change their policy.

Current & Future Cases

In respect of current cases, this may come as an unpleasant surprise & we will have to factor in the payment of statutory interest on any CT due after the commencement of the liquidation, and also manage the shareholder’s expectations. For future cases we will need to factor this in when it comes to planning the liquidation, ideally making sure that any CT due in respect of the final period of trading is paid pre-liquidation rather than post liquidation in order to avoid having to pay statutory interest.

Remember that if you do end up paying the CT in the liquidation earlier than the normal due date, ironically we may be able use Rule 14.44 (Debt payable at a future time) to obtain a refund from HMRC based on the formula in that rule. In theory, we could apply that rule when making the payment to HMRC in the first place, but given that HMRC might not accept that it fully settles the outstanding liability, then to avoid arguments I would pay first, then seek a refund later (although the costs of this may be prohibitive given the level of interest paid on early settlement of CT).

Finally, we assume that statutory interest will also be payable on any other taxes that fall due for payment after the commencement of the liquidation, such as VAT, PAYE and NIC so wherever possible, it is currently advisable that these are settled before placing the company into MVL.

If you have any queries regarding the above, please do not hesitate to contact Darren Wilson direct, either by email or telephone.

Darren Wilson FABRP MIPA

Tel: 01702 333105