Many advisers are warning that company directors need to start winding up procedures urgently if they don’t want to lose the valuable tax benefits available – but should there really be such a panic?
True – HMRC have issued anti-avoidance rules in an attempt to stop the opportunistic use of Entrepreneurs Relief and the mechanism of using an MVL to extract cash from the company, particularly if a new company is set up to replace the existing company within two years.
There has been undoubted financial benefit to many directors who were able to take advantage of this procedure – to read a case study from our own portfolio click here
The draft anti-avoidance rules published during December are likely to come into force on 6 April 2016. They are designed to prevent MVL procedures whose only real purpose is tax avoidance. For that reason they have clear boundaries. The MVL distribution will no longer by treated as a capital distribution in the following circumstances:
- If an individual (shareholder) receives a distribution from the winding up of a company, and
- Within two years after the distribution, the individual (or a connected party) continues to be involved in a similar trade or activity, and
- The circumstances surrounding the MVL had the purpose of obtaining a tax advantage. The tax relief available from an MVL is indeed valuable, but it needs to be considered as part of a realistic business planning process. There will still be significant tax savings available after 6 April 2016 provided that the shareholder does not fall foul of the above restrictions.
We are at the end of the phone and will give you a straightforward and objective answer to queries from advisors and their clients – 0333 014 3454
*The MVL process enables shareholders to wind up a solvent company and extract the remaining assets/cash at a lower tax rate than would normally be applied if this process wasn’t used. Entrepreneurs Relief may be used against the Capital Distribution in order to reduce the personal tax rate down to 10%