Liquidation isn’t always an unplanned financial disaster. Solvent winding up are quite common and sole traders, partners and directors voluntarily dissolving a business - or their part in the business - without financial disarray. The most obvious advantage for Corporate entities is ‘Members’ Voluntary Liquidations’ (MVL) which comes with ‘Entrepreneurs’ Relief’, where the amount of Capital Gains Tax payable on the disposal of qualifying business assets is quite heavily reduced.
Accountants across the United Kingdom will all know about this way of cutting tax from 40% to 10%, as it’s been in operation for over a decade. They will know that interest on the figure due can be saved if the money is held back until the last possible moment and paid along with any corporation tax that is owing at the end of the tax year.
All that has recently changed. HMRC are now keen to recoup the sum well before the corporation tax date. In fact, they want the money before the company is wound up. If payment is made after the Resolution to Wind Up the Company is made,HMRC will charge statutory interest from the date of the Resolution up to the date the tax is actually paid. Statutory interest is charged at a rate of 8% per annum or 15% in Scotland.
So if you’re an accountant or you are planning to wind up a company voluntarily and were planning on withholding funds, you’re going to need to address your tactics going forward.
Not everyone who opts for MVL can get access to Entrepreneurs’ Relief, however. Who meets the requirements for the scheme? Here’s the HMRC’s qualifying criteria:
Disposal of the whole or part of your business
You must have owned the business directly or it must have been owned by a partnership in which you were a member. Entrepreneurs’ Relief is not available on the disposal of assets of a continuing business unless they’re comprised in a disposal of a part of the business. HMRC refer to a business as a bundle of activities and for relief to apply, the activities included in the disposal need to be capable of being carried on as a business without the addition of anything further.
Disposal of goodwill of your business
If you dispose of the whole or part of your business on or after 3 December 2014 to a close company in which you and any ‘relevant connected person’ own 5% or more of the ordinary share capital then any gain on goodwill included in that disposal will not be eligible for Entrepreneurs’ Relief. Broadly, a close company is one which is controlled by 5 or fewer participants (such as, shareholders). This rule however won’t apply if you dispose of the shares of the close company within 28 days of the disposal of your business to a company in which you and any relevant connected person hold less than 5% of the ordinary share capital. Even when this rule applies, gains on other assets may be eligible for Entrepreneurs’ Relief.
Disposal of assets following cessation of your business
You must have owned the business directly or it must have been owned by a partnership in which you were a member throughout the qualifying period that ends on the date the business ceased. Additionally, the date the business ceased must be within the period of 3 years before the date of disposal of the asset.
If the asset in question was owned by you, but was in use by either a partnership of which you were a member or by a company at the time the business ceased, you may still claim the relief if this qualifies as an associated disposal.
Disposal of shares in or securities of your personal company
If the business is owned by a company in which you dispose of the shares or securities, then throughout the qualifying period of 1 year the company must be:
- your personal company (see below)
- either a ‘trading company’ or the holding company of a ‘trading group’
You must be either an officer or employee of that company (or an officer or employee of one or more members of the trading group).
A company is your personal company if you hold at least 5% of the ordinary share capital and that holding gives you at least 5% of the voting rights in the company. It’s possible for shares acquired under the Enterprise Management Incentive Scheme to qualify for Entrepreneurs’ Relief where the ‘personal company’ requirement is not met (see guidance at CG64052).
From 18 March 2015, the definition of ‘trading company’ or the holding company of a ‘trading group’ is subject to restrictions based on whether the company holds shares in a joint venture company or is a member of a partnership. These restrictions depend upon the indirect interest held by the individual claimant in the joint venture company or the assets/profits of the partnership. Further detail is available at CG64055 (Entrepreneurs’ Relief: trading company and holding company of a trading group).
The 1 year qualifying period ends generally on the date of disposal of the shares or securities. The exceptions are where the company ceases to be a trading company, or to be a member of a trading group, within the period of 3 years before the date of disposal. In such cases the qualifying period ends on the date the company ceased to qualify as a trading company or a member of a trading group.
The relief is also available where either:
- the company is wound up and dissolved with your shares being cancelled and a capital distribution is made in the course of that winding up
- any other capital distribution is made
In these cases, the qualifying conditions must all be met throughout the year ending with either:
- the date on which the capital distribution is made
- if earlier, the date of cessation of the trading qualification and the capital distribution is made within 3 years of the cessation
An ‘associated disposal’
To be an ‘associated disposal’ a disposal must take place in association with your withdrawal from a business carried on by either:
- a partnership of which you’re a member
- your ‘personal’ trading company in which you’re an officer or employee
This means that Entrepreneurs’ Relief won’t be due unless a disposal of an asset by you is associated with a reduction of your interest in the assets of the partnership, or a disposal of shares in your personal company (this ‘material disposal’ is what is meant by ‘withdrawal’) that itself qualifies for Entrepreneurs’ Relief. It’s not necessary for you to actually reduce the amount of work which you do for the business. If the disposal was made on or after 18 March 2015, the reduction of interest in the value of the assets of the partnership or the shareholding or value of securities must be at least 5%.
If you dispose of all of your interest in the assets of a partnership but it’s less than 5% then relief may still be possible on an associated disposal if you held 5% or more throughout 3 years during the 8 years ending with the date of the disposal. Relief is denied from that date where there are arrangements for the claimant or a person connected with them to acquire the shares, securities or partnership interest (but this doesn’t include the material disposal itself).
For example, you personally own a shop from which you trade in partnership. You have a 3/5 interest in the assets of the partnership and your partner 2/5. You reduce your involvement in the business so the interest is altered to 1/5 for you and 4/5 for your partner.
You also sell the shop to your partner. You continue to work full-time in the shop. In this case your reduction of your partnership interest represents a withdrawal from participation in the business and the disposal of the shop is associated with that withdrawal.
The ‘associated’ asset must have been in use for the purpose of the business throughout the period of 1 year up to the date of your withdrawal, or if earlier, the cessation of the business. The asset must also have been owned by you throughout a period of 3 years ending with the date of disposal if it was acquired on or after 13 June 2016.
The amount of gain eligible for Entrepreneurs’ Relief on a disposal of an ‘associated’ asset may be restricted in cases where either:
- the associated asset was in business use for only part of the time you owned it
- only part of the associated asset was in business use during the period you owned it
- you were involved in the carrying on of the business for only part of the period during which the associated asset was in business use
- some of the period during which the associated asset was in use for the business falls after 5 April 2008 and for that period after 5 April 2008 you received any form of rent for letting the business use it
Where one or more of these circumstances apply, only a just and reasonable proportion of the gain will qualify for relief. The periods involved and the level of any rent paid will be taken into account when working out this proportion.
If you’re an accountant and have a client that could benefit, we are available to assist you in developing your clients strategy ensuring the process is managed effectively and ensuring distribution of assets is made without delay. If you introduce clients to us or get in contact with us on their behalf, we can take the pain out of the situation for you.
Let us do the heavy lifting, ensuring HMRC approval of closure is obtained giving peace of mind to you and your client.