What does the Autumn Budget mean for the world of insolvency?
Tuesday, 30 October 2018
You may have read a Budget summary and have a good idea of the key policies that are set to affect the UK. However, less reported are the impending changes that will affect the insolvency landscape.
Solvent Members’ Voluntary Liquidations (MVLs)
Business owners will be pleased to hear that the Budget did not withdraw or reduce the rate of entrepreneurs’ relief. Entrepreneurs’ relief is a scheme that is open to directors who own 5% or more of a company, and which allows them to enjoy a 10% tax rate on capital gains, up to a lifetime limit of £10 million.
As such, MVLs remain a very attractive option for directors wishing to wind up their solvent businesses. However, the Budget did make the following changes, which could affect those considering an MVL.
Firstly, from 6 April 2019, the minimum period throughout which the qualifying conditions for relief must be met will be extended from 12 months to 24 months.
This has likely been brought in to combat abuse of MVLs, whereby businesses are set up and liquidated within a short period of time. There was a further introduction to tackle misuse of entrepreneurs’ relief:
“In addition to the current requirements on share capital and voting rights, from 29 October 2018, shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief. This is to address an identified abuse of the current rules.”
However, I don’t expect this to be an issue for the majority of our clients considering an MVL.
There were a couple of key announcements which I believe could have a big impact on the insolvency market. The first of these sees the re-introduction of preferential creditor status for HMRC:
“From 6 April 2020, when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors. This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee NICs, and Construction Industry Scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as Corporation Tax and employer NICs.”
HMRC previously held this status but it was abolished in 2002. The re-introduction of this status means that more money will be paid to HMRC and less money will be available to repay the floating charge creditors and/or the general body of creditors.
This is obviously not good news for trade creditors but the wider implications could be significant. The fact that floating charge creditors will see their positon weakened is likely to result in tighter lending criteria by the banks. This could be by way of reduced lending availability or higher rates for borrowing. Directors will likely be required to provide security against personal assets or personal guarantees (PGs).
I foresee an increase of insolvencies where directors have provided PGs as it could leave them less exposed if the insolvency event occurs ahead of this change to legislation.
Finally, the Budget introduced further legislation to combat tax abuse and insolvency:
“Following Royal Assent of Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.”
It’s not clear exactly how this will be applied but it’s of concern to those who have participated in tax avoidance schemes or other aggressive forms of tax planning.
If you’d like to know more about how these changes could affect your business then please call me on 0330 024 0888.