HMRCs new stance on MVLs can be turned to our advantage – if we are willing to adapt

20 February 2024

Andrew Duncan, Director of FTS Recovery, explores the impact of HMRC's decision to cease tax clearances for Members Voluntary Liquidations.

The long-standing issue between HMRC and the insolvency industry over delays to clearances for members voluntary liquidations has finally been resolved - with a surprising twist. 

Rather than taking action to speed up the process and address the serious backlog, as insolvency practitioners had urged, HMRC have opted to halt the provision of tax clearances for MVLs altogether. Their decision has sent shock waves through the industry and will have far reaching consequences for insolvency practitioners. But it does not necessarily follow that they will be all negative. 

For those of us willing to take the leap into a new way of working, HMRC’s policy shift could present an opportunity for enhancing our service offering and providing a better, faster service to our clients. 

With greater responsibility comes new possibilities

If insolvency practitioners are willing to adapt, this policy change will enable us to offer our clients a more comprehensive and streamlined service.

Unhindered by HMRC delays and bureaucratic procedures, the business owners we work with could receive capital distributions and closure of the liquidation process within a very short period following liquidation rather than years, as post-pandemic resource issues at HMRC have made the norm.

Without the need to keep cases open for lengthy periods while awaiting clearance, liquidation costs can be kept lower, freeing up funds for business owners and speeding up the insolvency process. 

That is not to say this move will be without its challenges. Obtaining tax clearance from HMRC has historically been a crucial step in the MVL process, serving as a formal assurance that the company’s tax affairs were in order. The transition to the new framework is unlikely to be a smooth one for many of us.

The consequences of HMRCs decision

The onus of evaluating and mitigating tax risks will now fall squarely on insolvency practitioners’ shoulders. It will be up to us to ensure no taxes are left outstanding and we could potentially be liable for any tax liabilities or distributions made where there have been either tax oversights or abuse.

We will need to delve deeper into the financial and tax histories of the companies we work with, scrutinising their tax records with precision, and ensuring liquidation procedures are not being employed for tax evasion purposes.

This will require more work and due diligence both prior to taking on an MVL and before any distributions are made. In complicated cases, it may also make it necessary to withhold a suitable level of funds until the tax position is resolved, resulting in delayed distributions to shareholders. 

Evaluating a company’s recent Corporation Tax returns as well as VAT, PAYE, NIC and CIS must become an integral element of our due diligence if we are to ensure all returns have been submitted and tax paid at the date of liquidation. These new responsibilities will likely require taking more detailed tax advice, particularly for complex cases. 

This change also potentially increases the risk we will need to call on shareholder indemnities, which is currently very rare. This could increase costs as well as the risk profile if the indemnities prove unenforceable for any reason and will be a particular concern when dealing with shareholders in foreign jurisdictions. Indemnity insurance is an option, but this could prove prohibitively expensive, and the enforceability of any such insurance is still in question.

In addition, in the past, HMRC have been unwilling to issue tax refunds due to companies in MVL without obtaining clearance from the MVL Team that no other taxes are outstanding and it is unclear how this situation will be dealt with by HMRC moving forward.

At first glance, the challenges may seem insurmountable. But they simply require a change in the way we approach MVLs. Yes, more work will be required, but that means we can offer more services to our clients. Yes, we may be required to take on more risk regarding any tax liabilities which are not traditionally part of our offering, but that is a chance for us to widen our skill sets and engage with tax advisers. 

We are still in the early stages of this transition, and our days of debating with HMRC over this issue are by no means at an end. More work will need to be done to put in place a fair and workable regulatory framework that strikes the correct balance between facilitating legitimate business wind-downs and preventing misuse of the system. The dialogue between HMRC and the insolvency industry must continue if we are to get this right.

Yet even as we collaborate to strengthen and refine the regulatory framework surrounding members voluntary liquidations, we can take heart from the knowledge it is possible to turn this change to our advantage. It is up to us whether we take advantage of the opportunities it offers us. 

For more information email: [email protected] or visit www.ftsrecovery.co.uk.

 Andrew Duncan

 Director of FTS Recovery