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Cessation of Tax Clearance in Members’ Voluntary Liquidations

With HMRC issuing a guidance note earlier this month saying that they no longer intend to provide tax clearance on solvent liquidations, what does this mean for the future? And is this good news or bad news? With this certainly being a hot topic amongst the insolvency community, here are the details and our views on how this might develop.

After a constant barrage of criticism from the whole insolvency community about the time it is taking for HMRC to work through correspondence and to provide tax clearance, somewhat left out of field and after much tinkering, it appears that HMRC have simply thrown in the towel.

On 6 December 2023, HMRC issued an insolvency guidance note saying that they no longer intend to provide tax clearance on solvent liquidations, sending all the regulators into a bit of a tail spin.

A couple of our accountancy contacts have mentioned that this must be a good thing. However, our initial view at BLB Advisory is that this is a guarded “probably good” but there will be an impact.

Shortly after the announcement, both R3 and the Insolvency Practitioners Association quickly issued guidance to its members on the additional steps that should be taken to safeguard against potential issues. It is timely to remind ourselves that from a money laundering risk perspective, the regulators already see solvent liquidations as a threat where abuse can easily occur. Now with HMRC not proactively reviewing cases for tax clearance but instead placing an onerous obligation upon the insolvency practitioner, this potential is further heightened.

Why is it not a good thing you may be asking. In our view, having HMRC provide tax clearance gave a clear barrier to any future challenge and gave the shareholders certainty that once the solvent liquidation had been concluded, everything had been dealt with properly.

In this new environment, what now happens if HMRC see a solvent liquidation that has been closed which has a tax issue they didn’t immediately spot? One remedy, if it is serious enough, may be to apply to Court to have the Company restored to the Companies House Register and to reactivate the liquidation. Given that in all solvent liquidations the shareholders provide an indemnity, this means that several years down the line, shareholders may be getting a nasty knock at the door and being asked to repay money back to the liquidation estate. Not only that, but the insolvency practitioner may be risking a complaint for not having handled the liquidation appropriately or not undertaking the necessary checks.

In summary, for solvent liquidations where the company has used an accountant with a good reputation, has good tax compliance and hasn’t attempted any edgy tax planning, this will be a very good development. It will mean that a solvent liquidation will go back to being dealt with in a 4 to 6 month period. However, if we get a phone call from a random company asking us to do their solvent liquidation for them and we didn’t know their accountant, we now might think twice.