One of the reasons individuals choose to undergo a Members Voluntary Liquidation (MVL) for their company is the favorable personal tax treatment of final funds. Unlike striking off a company, where final net assets over £25,000 are taxable as dividends, a MVL allows these funds to be taxed as capital gains. This often results in lower tax bills for shareholders.
Targeted Anti Avoidance Legislation (TAAR)
However, it’s important to be aware of the Targeted Anti Avoidance Rules (TAAR) related to liquidations.
The purpose of TAAR is to prevent individuals from repeatedly setting up companies, accumulating profits, stockpiling cash, and then liquidating the company to take advantage of capital gains tax treatment. This practice, known as “phoenixing,” is discouraged by TAAR.
Starting a New Company after MVL
In some cases, individuals may choose to liquidate their company through MVL to close it down, only to discover a great new opportunity shortly afterward. The question then arises: How can one safely start a new company without triggering a challenge under TAAR?
Important Considerations
In this guide, Chris Maslin from MVLOnline explains how the MVL process works – and importantly – why you need to be aware of the TAAR legislation if you want to set up a new company in the future.
It’s important to note that while we are not tax advisers, we frequently encounter this question from our clients. Therefore, we provide the following information in good faith.
Conditions for TAAR to Apply
For HMRC to challenge the capital gains tax treatment of funds received from an MVL and tax them as dividends instead, the following conditions must be met:
Condition A: The individual must have at least a 5% stake in the liquidated company.
Condition B: The company being liquidated must be or have been a “close” company controlled by 5 or fewer shareholders.
Condition C: The individual must engage in a similar trade or activity within two years.
Condition D: One of the main purposes of the liquidation must be tax avoidance or reduction.
Clear-cut Conditions
Conditions A and B are usually straightforward and apply to most MVL cases.
Condition D, although open to some interpretation, is difficult to challenge given the emphasis on “one of the main” purposes of the liquidation.
Condition C: “Similar Trade or Activity”
The interpretation of “similar trade or activity” is subjective, making it risky to rely solely on this part. Claiming a new business as “business coaching” after liquidating a management consultancy might face scrutiny. However, transitioning from an online widget-selling business to a restaurant may be less likely to trigger a challenge.
The Two-Year Period
The crucial aspect is the two-year timeframe mentioned in Condition C. Complying with this condition ensures a safe transition to a similar business without risking a challenge under TAAR. However, determining when the two-year period begins requires understanding the timeline of the liquidation process.
Understanding the Liquidation Timeline
Liquidations can be lengthy processes involving various steps, including ceasing trading, appointing a liquidator, distributing funds, obtaining HMRC clearance, and finalising the liquidation. This process can take several months or even years, depending on circumstances.
Trigger Point for Personal Tax Liability
As TAAR relates to personal tax liabilities, the trigger point revolves around the dates of fund distributions. MVLs typically involve distributing funds in chunks, with formal declarations accompanying each distribution. These declaration dates determine the shareholders’ formal receipt of the funds and are relevant for capital gains tax purposes.
The Two-Year Rule – An Example
Let’s consider an example to illustrate the implications. John Smith liquidates his solvent company, CompSolve Ltd, with £130,000 in the bank. The liquidation process spans from January 2023 to October 2023, with two distributions: £100,000 on February 2nd, 2023, and £30,000 on May 16th, 2023.
Starting a New Business
Based on the example, shareholders have the following options regarding starting a new business:
- Starting a new business before February 2nd, 2025, poses a risk as both distributions may be challenged.
- Starting a new business between February 3rd, 2025, and May 16th, 2025, means the £100,000 distribution should be safe, but the £30,000 distribution remains at risk.
- Starting a new business after May 17th, 2025, ensures the tax treatment of all distributions from CompSolve Ltd is entirely safe.
Summary
To summarise the key points:
- HMRC aims to prevent the conversion of income into capital for tax advantages.
- TAAR is in place to tax MVL distributions as dividends instead of capital gains in certain circumstances.
- Conditions A, B, and D typically apply to most MVL cases.
- Careful consideration of Condition C is crucial to remain compliant.
- Maintaining a gap of at least two years between MVL distribution dates and starting a new similar business is advisable.
For further information, read our complete guide to MVLs.