Seminar takeaways - Tax and Insolvency

On Wednesday 7 September, Karyn Jones, Director at Shaw Gibbs, was our guest speaker at LTS, and discussed some of the ways in which Insolvency Practitioners encounter tax issues, how tax issues might lead to insolvency and some tell-tale signs which tax practitioners can look out for to best help their clients.

We first discussed the difference between solvent and insolvent liquidations.

A solvent liquidation can take place where there are enough assets in the business to satisfy liabilities. It is often used due to the tax efficiencies of applying BADR for the capital gains tax rates when extracting remaining funds out of the business rather than extraction of dividends.

Several changes have taken place in relation to the legislation over the years including restricting the amount of funds that can be taken out as capital on a solvent liquidation; it is possible that further changes may arise in future, both in relation to the amounts taken out as capital as well as the limits on which business asset disposal relief applies. A solvent liquidation is often appropriate when a Director retires and sells the business, leaving the sale proceeds in the company to be distributed to shareholders as tax efficiently as possible. Alternatively, property developers tend to incorporate special purpose companies for a specific development and will liquidate once all the properties in the development have been sold, and all costs settled, leaving the profit to be distributed.

An insolvent liquidation is where the company is unable to pay its debts or its balance sheet is in a net liability position. Before the company gets to this stage, there are several warning signs you can look out for when preparing the accounts or tax returns. These include:

• falling turnover
• cash flow issues
• increased borrowings or funding for lesser known sources at higher rates
• key people leaving the business
• low staff morale

Karyn then went on to provide some case studies on solvent and insolvent liquidations. She highlighted that in a solvent liquidation, the Director must make a statutory declaration confirming that the company is solvent. Making an incorrect declaration is a criminal offence and serious consequences could follow.

To end, Karyn briefly mentioned the change in the order of priority of payments to creditors. Since December 2020, in insolvency processes, HMRC are now paid ahead of other unsecured creditors (in respect of payment of certain taxes collected or deducted by corporates for payment to HMRC) and also floating charge holders.

The implications for a company voluntary arrangement are that HMRC must be paid 100p in the £ otherwise the department will automatically reject any proposal. This could prevent the majority of CVAs being viable.

Scary stuff indeed. Contrary to instinct, it can be very useful to have an IP up your sleeve and to consult as early as possible if you see warning signs in your clients!

Share: