HomeHMRCDLAs Capital or Income when repaid on Solvent Liquidation

DLAs Capital or Income when repaid on Solvent Liquidation

DLAs explained

Debbie Cockerton explains the rules around director’s loan accounts in solvent liquidations and further charges from HMRC

We are often asked about the treatment of a director’s loan account (DLA) if the company goes into solvent liquidation – more commonly called a Member’s Voluntary Liquidation (MVL) – and there is a ‘test case’ by HMRC that clarifies that the distribution in specie is treated as income, rather than capital.

There have been various differing treatments of the DLAs following a distribution in specie and also different advice from tax experts, with some indicating that the distribution should be treated as a distribution of income and others say that it should be a capital distribution. However, HMRC have now clarified that it will be capital distribution, and they have stated: “Having listened to your arguments and having taken further technical advice; I advise that HMRC proposes to accept your contentions that Capital Gain (ER) tax applies to the overdrawn loan account (£XXXXXX) paid in specie on liquidation. We propose to accept that it was a capital payment for the purposes of S122 Taxation of Chargeable Gains Act 1992 (TCGA 1992) and does not fall within the parameters of S415 Income Tax (Trading and Other Income Tax (ITTOIA 2005).”

As there are differing treatments we now advise that the safest approach would be to ask for the DLA to be repaid back to the company before liquidation, so that it can then be distributed in cash rather than in specie, which would avoid any problems in the future.

However, if the DLA cannot be repaid back to the company, we point out the risks to the directors associated with the distribution in specie and then ideally the company’s accountants can advise that a distribution in specie will, or should be treated as a capital distribution, then a distribution in specie is still an option, but the directors will be forewarned if it ends up being treated as an income distribution.

I have previously advised that HMRC are now charging statutory interest at 8% in solvent liquidations from the date of liquidation for corporation tax, even if the tax debt has not fallen due yet, but the date of liquidation is now being treated as the due date. This change has been brought in with the Lehman Brothers case, and we have recently seen that HMRC are also asking for 8% interest on the outstanding PAYE monies due by the company and again, the commencement date is the date of liquidation and not the date that the monies fall due.

This can be a problem if a company has significant assets, or outstanding book debts to collect in, and therefore we would recommend that the assets are sold and book debts collected in prior to the company going into liquidation, so that the creditors and tax can be paid before liquidation, to avoid any interest becoming due to HMRC at the rate of 8% and will speed up the process of the monies being returned to the shareholders and the liquidator will be able to obtain tax clearance quicker from HMRC.

With any liquidation, it is always a question of timing, but this is especially true in a solvent liquidation with the introduction of these taxes by HMRC, which can be avoided with forward planning of the situation.

The earlier that advice is sought from an insolvency practitioner, the better and then there are more options. DCA Business Recovery offer free advice in complete confidence and will assess the situation and look for a solution to the problem. The dedicated ICPA Freephone Hotline on 0800 066 2540 is open 365 days a year, from 8am to 8pm should you require any advice with regards to any insolvency query that you or your client may have.

  • Debbie Cockerton is a Partner at DCA Business Recovery

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