In simple terms, tax clearance is confirmation from HM Revenue & Customs (HMRC) that a company’s tax affairs are in order. So why is this necessary when winding up a solvent company?
Members’ Voluntary Liquidation (MVL) is a tax-efficient way for shareholders to be repaid their capital from a business that is closing, as the distributions are treated as capital gains rather than income from dividends which attracts a higher rate of tax. It also ensures the company is closed down and stuck off correctly.
It is common practice when issuing a distribution to Members, for the Liquidator to request a signed indemnity stating if any liabilities are found at a future date, the members will repay the distributed assets to meet the same. This means the Liquidator has the confidence to pay out the bulk of assets held, having the reassurance if an HMRC or indeed any other liability becomes known, the assets will be reclaimed to meet them. Generally, a percentage of assets is retained until clearance is obtained which should cover any unforeseen debts and avoid the necessity of reclaiming distributions. Once clearance is received, a final distribution will be paid, and the liquidation will end.
In an MVL there must a declaration that the company is solvent and that all creditors will be paid within a specified timeframe, usually 12 months. This includes all tax liability. Therefore, a Liquidator will write to HMRC in relation to PAYE, VAT and Corporation Tax, advising of their appointment and asking for confirmation that all matters are up to date. Whilst companies are advised to have all matters finalised pre liquidation, often at this point that HMRC advises there is a missing CT return, usually from the date of the close of the last accounts to the date of liquidation, or an outstanding VAT period. The Liquidator will then lodge missing returns as once all outstanding matters have been addressed, HMRC will issue clearance. This is basically a letter confirming there are no outstanding matters that would prevent the company from being struck off which also gives comfort that no further queries will be raised in the future.
So how long does this take? Delays can be caused when companies have failed to have all tax matters brought up to date prior to liquidation. The time for HMRC to notify the liquidator of missing returns, the liquidator to complete and submit same thereafter HMRC processing, can lead to weeks, even months, of delay. Currently, the main cause for delays is the time HMRC are taking to issue clearance. Unfortunately, for various reasons including staff who usually work on clearance being deployed to other COVID related duties during the recent crisis, along with glitches in the rollout of new software during the same period, meant that HMRC accumulated a significant backlog. Whereas pre-COVID, an average MVL would take 6 -9 months, there are currently cases over 2 years old still awaiting clearance. HMRC seem to have drawn a line in the sand and any new cases are being set up and progressed as they were pre-COVID. As for the pre-existing cases, HMRC is currently working their way through the backlog. They are no longer taking calls to push on specific cases only to advise the date of mail with which they are currently dealing. Mail is being dealt with on a date received basis and we are led to believe there is currently still an 8–9-month backlog.