Dear Member
Background:
Following the move of the HMRC MVL team from Worthing to Edinburgh earlier this year members started to receive letters from HMRC requesting the payment of statutory interest at the rate of 8% and from the date of commencement of the liquidation. This marked a clear change of approach by HMRC as the established practice was to pay statutory interest to HMRC only form the date the tax fell due, some nine months after appointment (the passing of the resolution to wind the company up having brought the current accounting period to an end).
HMRC stated the following cases as the basis for their opinion;
- Re Lehman Brothers International (Europe)
- Lomas v Burlington Loan Management Ltd [2015] EWHC 2269 Ch
HMRC have advised R3 that there has been no change in policy, they are merely correcting an error in their previous approach.
Legal basis for paying statutory interest from the date of commencement of the liquidation:
The provision for the payment of interest out of a surplus remaining after payment of the debts is made by section 189(2) in respect of winding up and section 328(4) in respect of bankruptcy.
S189 IA 86 states;
Interest on debts
(1) In a winding-up interest is payable in accordance with this section on any debt proved in the winding up, including so much of any such debt as represents interest on the remainder.
(2) Any surplus remaining after the payment of the debts proved in a winding up shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the company went into liquidation.
(3) All interest under this section ranks equally, whether or not the debts on which it is payable rank equally.
(4) The rate of interest payable under this section in respect of any debt (the “official rate” for the purposes of any provision of this Act in which that expression is used) is whichever is the greater of-
a) The rate specified in section 17 of the Judgements Act 1838 on the day on which the company went into liquidation, and
b) The rate applicable to that debt apart from the winding up.
(5) In the application of this section to Scotland -
a) References to a debt proved in a winding up have effect as references to a claim accepted in a winding up, and
b) The reference to Section 17 of the Judgements Act 1838 has effect as a reference to the rules.
Section 328(4) states;
(4) Any surplus remaining after the payment of the debts which are preferential or rank equally under subsection (3) shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the commencement of the bankruptcy; and interest on preferential debts ranks equally with interest on debts other than preferential debts.
(5) The rate of interest payable under subsection (4) in respect of any debt is whichever is the greater of the following –
a) the rate specified in section 17 of the Judgements Act 1838 at the commencement of the bankruptcy, and
b) the rate applicable to that debt apart from bankruptcy.
Statutory interest re administrations is dealt with in r14.23:
(7) In an administration –
a) Any surplus remaining after payment of the debts proved must, before being applied for any other purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the relevant date;
b) All interest payable under sub-paragraph (a) ranks equally whether or not the debts on which it is payable rank equally; and
c) The rate of interest payable under sub-paragraph (a) is whichever is the greater of the rate specified under paragraph (6) and the rate applicable to the debt apart from the administration.
The provisions are materially identical for each insolvency process and they provide that interest is payable on those debts in respect of the periods during which they have been ‘outstanding’ since the company went into liquidation or the commencement of bankruptcy or administration.
Prior to the decision in Re Lehman Brothers International (Europe) (sub nom Lomas v Burlington Loan Management Ltd [2015] EWHC 2269 (Ch) (David Richards J), the commonly held view was that ‘outstanding’ was a reference to the date when the debt in question became payable. As such, HMRC adopted the policy of seeking statutory interest for the period starting from when the debt became due and not from the date of winding up (or the commencement of bankruptcy).
However in Lehman Brothers [2015] EWHC 2269 (Ch), David Richards J considered whether statutory interest should be applied to future and/or contingent debts from the same date as it is applied to debts due before the commencement of an administration (that is, should interest run from the date of administration for all debts – whether present, future or contingent).
His conclusions (at paras 188-225) were that;
- The provisions re statutory interest are equivalent in administrations and
liquidations.
- The statutory definition of ‘debt’ includes future or contingent debts as well as
present debts.
- Future and contingent debts are simply debts for the purposes of proof and
distribution.
- Present, future and contingent debts, once they are valued and accepted for
distribution, are treated the same and rank pari passu.
- Insolvency law works on the principle that realisation of assets and the
distribution of the proceeds notionally takes place at the date of administration.
- The ‘debts’ referred to in the provisions are the admitted proofs not the
underlying claims and so are treated as being due from the date of
commencement of administration.
- Statutory interest is not compensation for non-payment of the underling debt
and so there is no compelling reason why it should not run from the date of
administration rather than when the underlying debt became due.
As such, David Richards J determined that future and contingent debts attract statutory interest from the date of administration. He repeated this conclusion in Re Lehman Brothers International (Europe) [2016] EWHC 2131 (Ch) at [6].
‘There does not appear to be any obvious reason why the same should not apply to liquidations. Therefore statutory interest in occasions of surplus, such as in an MVL, is payable on a tax debt from the date of liquidation whether or not the underling tax was due before liquidation, at some point afterwards or not yet due at the time of distribution’.
What has R3 done to date?
We have discussed the apparent change of HMRC approach with HMRC via the various working party groups which meet regularly with HMRC. We have also raised this matter directly with Mike Howe, Director of Business Tax Operations, HMRC. In addition we have made aware the person to be appointed shortly in the Insolvency Customer Service Manager Role within HMRC. It is understood that their legal and policy teams are currently considering the response to make back to R3 and our members.
We agree with the comments made by Hilyard J in Re Lehman Brothers (International) Europe [2016] EWHC 2492(Ch) at [84] that it was extremely “unsatisfactory” for HMRC to change their position on matters concerning insolvencies. We have pointed out to HMRC that the practice has been established over a long period of paying interest to HMRC only on amounts outstanding after the date the tax was due, and we have been advised by a number of members that where they have sought to pay interest from the date of commencement previously, the sum relating to the interest was always returned to the office holder. We have highlighted the detrimental effect on the profession of the change in approach, particularly where advice has been given to shareholders, and monies returned to shareholders based on accepted working practices at that time (that interest would not be due provided the tax debt was paid in full before the end of the accounting period). We have avoided however drawing HMRC’s attention to the quantum of claims involved.
We continue to press HMRC for a prompt response to our concerns raised and in particular reassurance that such changes in approach will not be applied retrospectively.
It would greatly assist us with these discussions if any members were able to provide us with written evidence that HMRC have changed their approach with regards to seeking statutory interest as this would greatly assist us in these discussions.
What should R3 members be doing in the meantime?
R3 is not able to provide specific tax or legal advice and members are recommended to seek their own professional advice in this regard. There are some practical steps you may wish to take however, until formal written guidance is received from HMRC that these practices are acceptable to mitigate any interest arising, you should remain cautious.
1. In new cases where the liquidation has not yet commenced office holders should advise shareholders of HMRC’s change of approach and may wish to ensure that funds are available to pay interest on any debt due to HMRC from the date of liquidation.
2. On cases which remain open there are a number of options currently being applied by office holders:
i. Make an estimate of the tax due and advise shareholders to pay the amount in full prior to the commencement of the liquidation.
ii. Make an estimate of the tax due and advise shareholders to pay the amount in full on the first day of the liquidation.
iii. Apply Rule 14.44 Debt Payable at a future time to the claim by HMRC and discount the claim for early payment.
It is unclear at the moment whether HMRC will accept these practices to reduce the amount of interest claimed and office holders should therefore be cautious in their approach, making it clear, in writing, to HMRC as to how their claim has been dealt with and also documenting any decision process on their working files.
We understand the difficulties that office holders are currently facing in dealing with shareholders who are now being asked to provide additional funds to cover the claims of HMRC for statutory interest to be applied from the date of commencement of the liquidation. We will continue to press HMRC for a prompt response in this regard so that this matter may be resolved moving forward.
