Published: 01/02/2016 By James Patchett
Proposed changes to the taxation of distributions in Members’ Voluntary Liquidations (MVL)
In March 2012 HM Revenue & Customs introduced a cap of £25,000 on the amount of capital that could be paid out to shareholders on the dissolution of a company and be treated as a distribution of capital rather than income. This had the effect of significantly increasing the number of MVLs.
Capital distributions are subject to capital gains tax which is charged at 18% or 28% compared to income tax which may be charged at a higher rate.
At present all distributions made to shareholders in MVLs are treated as distributions of capital rather than income. The tax paid by the shareholder may be reduced even further, to 10%, if they qualify for entrepreneurs' relief.
Changes to the way that shareholder distributions in MVLs are to be treated are planned to come into effect on 6 April 2016 and may result in some, but not all, shareholders paying significantly higher rates of tax than they do at present.
A new Targeted Anti-Avoidance Rule (TAAR) is proposed to be introduced that will treat distributions to shareholders as dividends rather than distributions of capital, where:
An individual who is a shareholder in a close company (Companies with five or fewer shareholders) receives a distribution from a MVL; and
Within a period of two years after receiving a distribution from an MVL the shareholder (or a person connected to the shareholder) continues to be involved in a similar trade or activity (whether through a company or not); and
One of the main purposes of the MVL was to obtain a tax advantage.
While the “main purposes” of a MVL may be arguable, we understand that where the second condition is met, it is likely that the third condition will be presumed to also have been met. Accordingly, we would recommend that clients who wish to reduce uncertainty seek advice without delay. The introduction of this rule, coupled with the 7.5% increase in the tax on dividends that will also come into effect after 6 April 2016, will increase the rate of tax to as much as 38.1%.
Shareholders who have been considering placing their companies into MVL or who may wish to continue in the same or a similar trade or activity after their current company is wound up should take advice as soon as possible, as distributions made after 6 April 2016 may be caught by the increased dividend tax rate.
If you or any of your clients wish to discuss the proposed changes or want to place a company into a MVL please contact James Patchett on 020 8661 7878 or 07712 530720 and by email at james.patchett@turpinba.co.uk