HMRC attacking treatment of director loan MVLs

[Maslins]

Full text of link is behind a login, but you can see headline here, 4th bullet point. Some key text pasted below:

"Overdrawn directors’ accounts

HMRC is also trying to change established practice in relation to overdrawn director’s loan accounts. If such an account was in place at the start of the MVL, the standard practice was for the insolvency practitioner (IP) to distribute this in specie – in other words, in non-monetary form by way of a paper transaction. The alternative would have been the director having to repay the loan in cash and then receive a distribution of the cash balance back from the IP.

HMRC is now understood to be running a test case to challenge this approach – seeking to reclassify the distribution of the loan account as income rather than capital. This would enable HMRC to charge tax, in effect, at a potential rate of up to 38.1% as a dividend rather than at the 10% (if entrepreneurs’ relief applies) or 20% capital gains tax rates. Regardless of the outcome of the test case, the new position seems likely to be enshrined in law in future."

There seems to be a growing desire for people to take funds out earlier, rather than follow proper practice of leaving funds in the company bank to be formally dealt with by the liquidator. Maybe those doing so won't get the tax treatment they wanted.

[rogerfederer]

Full text of link is behind a login, but you can see headline here, 4th bullet point. Some key text pasted below:

"Overdrawn directors’ accounts

HMRC is also trying to change established practice in relation to overdrawn director’s loan accounts. If such an account was in place at the start of the MVL, the standard practice was for the insolvency practitioner (IP) to distribute this in specie – in other words, in non-monetary form by way of a paper transaction. The alternative would have been the director having to repay the loan in cash and then receive a distribution of the cash balance back from the IP.

HMRC is now understood to be running a test case to challenge this approach – seeking to reclassify the distribution of the loan account as income rather than capital. This would enable HMRC to charge tax, in effect, at a potential rate of up to 38.1% as a dividend rather than at the 10% (if entrepreneurs’ relief applies) or 20% capital gains tax rates. Regardless of the outcome of the test case, the new position seems likely to be enshrined in law in future."

There seems to be a growing desire for people to take funds out earlier, rather than follow proper practice of leaving funds in the company bank to be formally dealt with by the liquidator. Maybe those doing so won't get the tax treatment they wanted.

The article seems chopped for non subscribers.

If I have a lot of money sitting in a Limited Company business bank account and I wish to close it down using the MVL route, we are no longer able to do so by simply paying CGT due? Or only if a Director's Loan was involved in some respect prior/during the MVL being started?

Reason I ask: I am fully expecting the MVL route to be closed down eventually for one-man director Limited Companies and wonder whether I should start this process sooner, rather than later.

[jamesbrown]

The article seems chopped for non subscribers.

If I have a lot of money sitting in a Limited Company business bank account and I wish to close it down using the MVL route, we are no longer able to do so by simply paying CGT due? Or only if a Director's Loan was involved in some respect?

The latter, i.e if the director retains the outstanding loan as a capital distribution, rather than paying it back and then taking a capital distribution. But I think this points to a direction of travel more generally with MvLs.

[Maslins]

If I have a lot of money sitting in a Limited Company business bank account and I wish to close it down using the MVL route, we are no longer able to do so by simply paying CGT due? Or only if a Director's Loan was involved in some respect prior/during the MVL being started?

Reason I ask: I am fully expecting the MVL route to be closed down eventually for one-man director Limited Companies and wonder whether I should start this process sooner, rather than later.

Basically to confidently get CGT treatment, ensure you leave all the cash in the company. The liquidator can then pay it out as part of the liquidation. At least for the time being it seems nobody is querying the tax treatment of this.

What people sometimes want to do (either for security reasons fearing the liquidator might run off with the cash, or not wanting/being able to wait for the cash) is take a large chunk of the cash out of the company bank account before the liquidation starts. In the short term it's considered a director loan (ie it's not a dividend, they're just borrowing the money). Then as part of the liquidation, the liquidator does a "paper only" distribution to clear the loan. It's being suggested HMRC may be attacking this strategy and attempting to argue the draw down of the funds was a dividend, not a loan, and hence the paper only distribution by the liquidator didn't really happen/is ignored.

[ChimpMaster]

Basically to confidently get CGT treatment, ensure you leave all the cash in the company. The liquidator can then pay it out as part of the liquidation. At least for the time being it seems nobody is querying the tax treatment of this.

What people sometimes want to do (either for security reasons fearing the liquidator might run off with the cash, or not wanting/being able to wait for the cash) is take a large chunk of the cash out of the company bank account before the liquidation starts. In the short term it's considered a director loan (ie it's not a dividend, they're just borrowing the money). Then as part of the liquidation, the liquidator does a "paper only" distribution to clear the loan. It's being suggested HMRC may be attacking this strategy and attempting to argue the draw down of the funds was a dividend, not a loan, and hence the paper only distribution by the liquidator didn't really happen/is ignored.

Odd that HMRC would attack this. They should just look at the timing of the loan and if it avoids the time limit for S455 (up until Liquidation completes) then allow it to be repaid by a paper distribution. I can't see what the fuss is about; it's a minor technicality.

On MVL don't you paid the shareholders a % very soon anyway? And the rest some 6 months later?

[Maslins]

Odd that HMRC would attack this. They should just look at the timing of the loan and if it avoids the time limit for S455 (up until Liquidation completes) then allow it to be repaid by a paper distribution. I can't see what the fuss is about; it's a minor technicality.

On MVL don't you paid the shareholders a % very soon anyway? And the rest some 6 months later?

It shouldn't impact the lion's share of our (ex)clients even if HMRC do get our way. Our general rule has always been cash only...however on occasion we have been a bit flexible for one director/shareholder cases where they'd taken out some cash in advance.

How long until the first distribution varies, primarily based on who the client company banks with. Barclays/Cater Allen are very quick (so perhaps 2 weeks in total), Lloyds/NatWest/RBS are rubbish (so perhaps 6-8 weeks). Santander/HSBC somewhere in the middle.

From our selfish perspective I think this is a good thing. We've always felt a bit uncomfortable about the director loan option. However from a commercial perspective when a potential client has two MVL providers to choose from, we say they'll get most funds a month or so after liquidation, and our competitor says they can take the money now, all else being equal we wouldn't get the case.

[MrContractor85]

MVL’s – Overdrawn Loans to remain unpaid… - Bridge Newland Ltd

HMRC have backtracked?

[MrButton]

HMRC attacking treatment of director loan MVLs

MVL’s – Overdrawn Loans to remain unpaid… - Bridge Newland Ltd

HMRC have backtracked?

If I understand correctly, Maslins posted about this recently and said he would be talking to his business partner (the licensed liquidator) to see if they can offer this as part of their service again.

But may have got the wrong end of the stick.

Edit. It’s in the post above

[cojak]

From our selfish perspective I think this is a good thing. We've always felt a bit uncomfortable about the director loan option. However from a commercial perspective when a potential client has two MVL providers to choose from, we say they'll get most funds a month or so after liquidation, and our competitor says they can take the money now, all else being equal we wouldn't get the case.

I looked at other companies. Generally not only were they twice as expensive as you, I felt that they took too much control of my money before passing it to me. Yes, you took a bit longer but I had no need for the money and the other criteria were more important.

[ahspooner]

I interpreted it the same way as yourself. I'm engaging them anyway regarding my MVL , but if they can offer this for me, then this would be my preference, purely to expedite the process.

If I understand correctly, Maslins posted about this recently and said he would be talking to his business partner (the licensed liquidator) to see if they can offer this as part of their service again.

But may have got the wrong end of the stick.

Edit. It’s in the post above