Tuesday, September 12, 2017

Statutory Interest on Corporation Tax in MVLs


Back in May we Blogged about a couple of issues with HMRC, including HMRC requiring statutory interest on Corporation Tax (CT) where it is paid after the normal due date, rather than just their normal late payment interest of 3%.  Following feedback from clients it is now clear that HMRC policy has in fact extended beyond that with significant implications for current and future MVLs.  HMRC now require the payment of statutory interest at 8% from the commencement of the liquidation on any CT due that falls due for payment after that date, even if the normal due date for payment of the tax is not until after the commencement of the liquidation, and payment is made before the normal due date.

HMRC are relying on a decision in one of the Lehman’s cases for this change in policy.  That case indicated that statutory interest was due on both future debts, and contingent debts, and since CT payable on a normal due date after the commencement of a liquidation is a future debt then statutory interest falls due.  While that judgement related to an Administration HMRC are arguing that in view of the similarity in wording in the legislation then it applies equally to liquidations.  The standard letter that they are sending to liquidators with the demand for statutory interest says:
 
“Our understanding of the correct treatment of statutory interest derives from the decision of David Richards J in Re Lehman Brothers International (Europe): Lomas v Burlington Loan Management Ltd.  In a supplemental decision he restates his conclusion that “interest under Rule 2.88 (statutory interest) is payable on future debts and on the amount admitted to proof in respect of contingent debts from the date on which the administration commenced”.
 
We appreciate that these decisions related to Administrations but given that the provisions set out in Rule 2.88 of the 1986 Rules were mirrored by Section 189 and Rule 4.93 and are repeated in the current Rule 14.23 (with Section 189 still applicable) they would appear equally applicable in a winding up.”

This is effectively a hidden tax on entrepreneurs since HMRC are receiving interest that would not be due other than for the decision to cease trading to permit the members to extract their capital from the company. R3 are aware of this change and are in contact with HMRC about it, but it is likely to require a Court decision in an MVL to make HMRC change their policy.

In respect of current cases you will have to factor in the payment of statutory interest on any CT due after the commencement of the liquidation, and also manage the shareholder’s expectations.  For future cases you will need to factor this in when it comes to planning the liquidation, making sure that any CT due in respect of the final period of trading is paid pre-liquidation rather than post liquidation in order to avoid having to pay statutory interest.  That could involve paying CT based on the calculation of the accountants preparing the CT return rather than waiting for HMRC to raise an assessment. 

Remember that if you do end up paying the CT in the liquidation earlier than the normal due date, you can then use rule 14.44 (debt payable at a future time) to get a refund from HMRC based on the formula in that rule.  In theory, you could apply that rule when paying the dividend in respect of CT to HMRC in the first place, but given that HMRC might not accept that it fully settles the outstanding liability then to avoid arguments pay first, then seek a refund.

Finally, we assume that statutory interest will also be payable on any other taxes that fall due for payment after the commencement of the liquidation, such as VAT, PAYE and NIC.