Insolvency News – The end of HMRC tax clearances in solvent liquidations

HMRC will shortly be informing the entire UK insolvency profession that they will no longer be giving tax clearance in solvent liquidation cases (“MVLs”). 

The notion of HMRC providing tax clearance in MVLs was based not on any legal or best practice obligation but rather a custom or unwritten consensus built up over time between the insolvency profession and HMRC to give the latter an opportunity to carry out such internal checks as they deemed necessary that the company owed no tax and to give comfort and protection to a liquidator that that indeed was the case before distributions to shareholders were made.

That custom / consensus worked relatively well for many years until the Covid pandemic struck when HMRC reallocated resources away from their MVL tax clearance departments to their Covid financial support scheme departments.  The effect of that resource allocation was that HMRC since 2020 have been taken an inordinate amount of time to give tax clearance in MVL cases to the detriment of shareholders waiting for their money. 

HMRC have now decided (no doubt to save money) that they will no longer issue tax clearance in MVL cases.

What this means for accountants and their clients thinking of entering into a MVL is that they ought to be extra careful to ensure that the client has complied with all its tax obligations and paid or otherwise provided for all taxes because no longer will a liquidator simply be able to rely on the obtaining of tax clearance from HMRC to obtain comfort that HMRC is not a creditor.  A liquidator will now have to (or at least a prudent liquidator should) carry out due diligence to check that there are indeed no tax liabilities before making distributions to shareholders. Since this carries a cost burden, it is better that that cost burden is minimised by carrying out that due diligence before the formal liquidation process commences.  

Since 2020, we have not sought tax clearance for the MVLs we have dealt with as it became clear that trying to obtain tax clearance from HMRC within a reasonable period of time after the formal liquidation process commenced was nigh impossible.

In order to ensure that our shareholder clients did not become frustrated by delays, we did not obtain tax clearance when we were satisfied that the client had paid (or otherwise provided for) all tax liabilities.  No doubt, this or a similar approach to carry out the necessary due diligence will now be the norm across the entire insolvency profession.

This news will should allow the Insolvency Profession to carry out MVLs quickly to enable an expeditious return of funds to clients.

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