Members' Voluntary Liquidations: Taxing questions on distributions

By ICAS Tax and Insolvency Teams

4 February 2016

HMRC has issued draft clauses to the Finance Bill 2016 which if passed will bring some significant changes to the tax implications of Members’ Voluntary Liquidations.

This is all being done on a very short timescale – with the new rules expected to be applied from 6 April 2016.

Differential rates of tax

Changes to the taxation of dividends being brought in from 6 April, 2016 mean that there is now a very significant difference between the tax cost to shareholders of income and capital distributions from companies.

The structure for dividends will be:

  • 0% on the first £5,000
  • 7.5 per cent where taxpayer is liable at basic rate
  • 32.5 per cent where taxpayer is liable at higher rate
  • 38.1 per cent where taxpayer is liable at additional rate

By contrast, where the distribution falls to be taxed as capital, basic rate taxpayers face a capital gains tax rate of 18 per cent, with higher and additional rate taxpayers liable at 28 per cent. Where Entrepreneur’s Relief is available, the rate of Capital Gains Tax can be reduced to 10 per cent.

Phoenixism and Moneyboxing

The government is concerned that this increased tax differential will lead to deliberate abuse of the rules, such as:

  • Phoenixism – where individuals will deliberately put a successful company into MVL and immediately re-start the business though a different company or business vehicle: the MVL being used simply to extract profits as capital so they are charged to the lower CGT rates
  • Moneyboxing – where a company with artificially-high retained profits is put into MVL, again in order to extract profits as capital

To counter this, new rules are being introduced to amend the Transactions in Securities rules In Part 13 of Income Tax Act 2007 (ITA 2007). The latter were designed to restrict the ability of Close Companies to extract amounts as capital; instead charging them as income distributions.

A new Targeted Anti-Avoidance Rule on Winding Up

Clause 18 of the Finance Bill 2016 introduces a new section 396B into the Income Tax (Trading and Other Income) Act 2005 (with mirror image proposals for non-resident companies as s 404A ITTOIA 2005).

The new section will bring distributions in a winding up within the charge to income tax where:

  • Condition A – the company is a close company, or was such within the two years prior to the winding up
  • Condition B – at any time within a two year period after the winding up:
    1. the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company,
    2. the individual, or a person connected with him or her, is a participator in a company which at that time –
      1. carries on such a trade or activity, or
      2. is connected with a company which carries on such a trade or activity, or
    3. the individual is involved with the carrying on of such a trade or activity by a person connected with the individual.
  • Condition C – it is reasonable to assume, having regards to all the circumstances, that –
    1. the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or
    2. the winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax

These rules bring a degree of uncertainty to the process, and increase the number of factors to be considered.

Arrangements in progress

In terms of timescale, the new rules apply in relation to distributions made on or after 6 April, 2016. So placing a company into liquidation before the end of the tax year will not avoid the new rules, unless distributions to shareholders are completed by 5 April.


Some director shareholders may wish to dis-incorporate and carry on the business via a partnership or as a sole trader. Section 58, Finance Act 2013 ‘disincorporation relief’, introduced a limited way to achieve this, without the transfer being subject to Market Value rules for CGT.

However, many situations will fall outwith the s58 relief and the new rules are clearly relevant as the business once carried on by the company, will in future be carried on by a related party. Clarification is being sought from HMRC on when ‘it is reasonable to assume’ that ‘tax was main purpose or one of the main purposes of the winding up’ in such scenarios.

Striking off

The rules with regard to distributions in respect of share capital, in anticipation of a company being struck off, are unaffected (section 1030A Corporation Tax Act 2010). The £25,000 limit on distributions under 103A (5) (b) still applies, and the company must collect debts, and pay liabilities, and be struck off within 2 years of the distribution.

A widening net

The Finance Bill also extends the Transactions in Securities rules within part 13 of Income Tax Act 2007 (ITA 2007).

In particular:

  • Section 684(1) ITA 2007 will apply to a tax advantage obtained by any person, not just the person who is a party to the transaction in securities
  • The list of securities in s 684 (2) is extended to explicitly include repayments of share capital / premium and distributions in respect of securities in a winding up
  • S 685 is extended to include amounts available for distributions from subsidiaries under the close company’s control
  • S 686 is amended to redefine what is meant by a ‘fundamental change in ownership’, by looking to the change in ownership, voting rights and entitlement to distributions of the ‘original shareholders’ i.e. the shareholders before any transaction took place
  • The definition of ‘associate’ in s 713 is amended

Finance bill clauses 16 (8) to (10) make it clear that, to avoid the new rules, any transaction, or series of transactions, will need to be completed by 5 April 2016 (though the tax advantage may accrue later).

More significantly, where HMRC has issued a clearance notice prior to 6 April 2016, but the transaction(s) covered by the notice occur on or after 6 April 2016, then, if the transaction would be caught by the new rules, the clearance notice is void.


While IPs may spend much of their time dealing with insolvent businesses, these rules raise significant issues for solvent liquidations and business restructuring.

There is a danger of more uncertainty and delays as tax is likely to be a factor, even when it is far from being the primary factor.

Advisers will need to look at the tax implications for shareholders, before deciding on the best course of action for business restructuring.

The consultation on the new rules closed on 3 February. The draft legislation can be viewed on


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  • Legislation
  • Insolvency

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