On 6 December 2023, HMRC published a bulletin regarding its decision to cease providing pre and post appointment tax clearances to Insolvency Practitioners (IPs) acting as Liquidators of Members' Voluntary Liquidations (MVLs) – i.e. solvent liquidations.
This change was applied with immediate effect, meaning outstanding requests already submitted to HMRC will not be responded to. It is our understanding that, instead, Liquidators should "close cases without tax clearance, subject to their professional judgement".
Whilst it is the case that there is no statutory framework for HMRC to provide tax clearance, it has long been industry practice for Liquidators to obtain written clearance from HMRC before moving to close MVLs. This new announcement is a fundamental change which will affect the steps required to be able to conclude solvent liquidations. However, it should, in the main, eliminate a growing frustration whereby clearance requests would routinely go unanswered for many months.
In light of this news, our specialist Insolvency and Recovery team are reviewing the guidance issued by their trade association, R3, and seeking clarification on any alternative actions that should now be taken to protect the interests of all stakeholders. We will share further information and clarification on this as it becomes available. What is already clear, however, is that it will now be more important than ever for business owners to work collaboratively with their chosen Liquidators, accountants and tax advisors to ensure all tax matters are fully dealt with prior to commencement of a solvent liquidation, or there is at least an agreed strategy for dealing with any matters that cannot be resolved prior to appointment.
What do I need to consider?
Prior to the appointment of the Liquidator
Prior to the appointment of a Liquidator, business owners should work with their advisors to ensure that:
- Accounting records are of sufficient quality to allow all tax filings to be made
- Tax filings are up to date across all heads of tax and all outstanding taxes have been paid
- There is no ongoing HMRC enquiry into any matter
- Copies of elections and filings for pre-appointment periods are reviewed and appropriate action taken, e.g. surrender of group relief or the removal of the company from a VAT group
- Contact is made with the Customer Compliance Manager at HMRC, where appropriate, regarding the company's tax compliance
- The balance sheet is simplified as far as possible to ensure that matters that require the company to be a member of a group are dealt with, e.g. the release of inter-company debts.
Following the appointment of the Liquidator
Following their appointment as Liquidator, the IP (now as the Proper Officer of the company for tax purposes) will have at least two periods for which they will need to file corporation tax returns with the assistance of the company's accountant. These periods are:
- The period ending on the day immediately before their appointment with any tax due ranking as a creditor claim; and
- The period (of up to 12 months) starting on the day of their appointment, with any tax due ranking as an expense of the liquidation.
Ideally, all pre-appointment tax returns should be filed prior to the liquidation and the resulting tax liability paid (even if not yet due). If this is not the case, a Liquidator will wish to file any pre-appointment tax return as soon as possible after appointment and will need to settle the liability, plus statutory interest at 8% per annum from the date of liquidation.
Where appropriate, and if not actioned prior to liquidation, a Liquidator will also need to:
- File any final quarterly returns prior to de-registering the company for VAT
- Submit any outstanding payroll tax filings and close the scheme
- Satisfy themselves and clearly document that all other relevant filings have been submitted for the post-appointment period.
Only once the Liquidator is satisfied that the company is dormant, all tax filings have been made and all relevant taxes paid for both the pre and post-appointment periods, will they proceed to notify HMRC of the intention to dissolve the company and exit from office. Reasonable time will still need to be given to HMRC to process any returns before closure, as this is likely to reduce the risk of a subsequent enquiry.
It is likely, in the absence of clearance letters being issued, Liquidators will also routinely send 'notice of intended dividend' to all potential creditors, including HMRC, to give a final opportunity for any claims to be submitted but this cannot be solely relied upon.
We are advised that, in the event that the company is dissolved and HMRC believes that its tax affairs have not been dealt with satisfactorily, then their recourse would be to either apply to restore the company to the Register or to employ secondary liability provisions to recover funds from other parties, e.g. against any broader corporate group, the directors, the shareholders or, in very limited circumstances, to IPs themselves. For this reason, the Liquidator is increasingly likely to seek indemnities from shareholders who receive capital distributions, as a form of protection if it later transpires that there were unknown or undisclosed liabilities to creditors (including HMRC).
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.