Short answer, no!
We’re increasingly being asked this following the many Managed Service Company (MSC) enquiries recently opened. HMRC believe Churchill Knight and Boox are “MSCP”s. This means many of their clients, past and current, are potentially liable for much higher taxes on historic income.
Having an ongoing HMRC enquiry into your company’s tax affairs doesn’t prevent you from putting your company into liquidation. However, it won’t solve the underlying problem.
Prior to any MVL appointment, the director(s) will need to make a Declaration of Solvency in front of a solicitor. This will include a mini balance sheet of the company’s financial affairs.
If there’s an open HMRC enquiry, that is a company liability. It may be a contingent liability (ie at this stage nobody knows whether it/how much will be due), but you should work with your accountant to decide a fair value for this.
If you make a Declaration of Solvency without having reasonable grounds that the company will be able to pay all its debts in full, that’s a criminal offence, which can lead to a fine or prison sentence.
So, if your plan is keeping quiet about it and hoping it’ll all be fine…think again!
This is an option, and legally you’d be doing nothing wrong. You still have some significant issues though.
A valuation would be put on the liability, based on the expected chances of win/loss and the amount at stake. This would be included on the Declaration of Solvency. The liquidator’s aware of the open HMRC enquiry and agrees to take the case on. Then what?
A key part of the liquidator’s role is to seek HMRC clearance. HMRC would refuse this until any enquiry is resolved. They’d make it clear they believe there’s a claim.
HMRC enquiries can take years to resolve. Where the liquidator knows there’s an open claim, they can’t finalise the case.
Putting your company into an MVL won’t give you resolution sooner. It simply adds a “middleman” between you and HMRC. The liquidator has a duty to adjudicate creditors’ claims, including HMRC, and settle them from the Company’s assets. If the conclusion of the enquiry is that the Company owes £x to HMRC you would have to ensure the Company has sufficient funds available on liquidation to meet that claim. The liquidator will chase you for funds and they have significant legal powers to help them if you try not to play ball.
You’ve got the added cost that the liquidator won’t deal with this for free. Hence the end result is you’ve got the exact same problem of a lengthy period waiting until resolution of the HMRC claim, still paying any final amount agreed, plus you’ll now be paying significant extra fees to the liquidator to relay information (and potentially funds) between you/HMRC.
In this situation, it’s not (or no longer) an MVL, it’s potentially a Creditors Voluntary Liquidation (CVL).
MVLs are for solvent companies, those with sufficient assets to pay all their liabilities.
CVLs are for insolvent companies, where liabilities exceed the assets.
An MVL can potentially be converted into a CVL if significant liabilities only become apparent after the liquidator’s appointment.
Whilst you and the Limited Company are two separate legal entities, if the only reason the company is now insolvent is due to you extracting all funds after the enquiry was raised, again you could be in hot water.
As mentioned above, as soon as HMRC launch an enquiry claiming a large amount, your company has a contingent liability. This reduces the company’s net assets/retained profit. Dividends, or indeed MVL distributions, can only be declared from retained profits.
You therefore can’t lawfully take significant dividends or be given MVL distributions from the company after the enquiry is launched, unless you’re leaving sufficient amounts to comfortably settle a reasonable expectation of the claim.
Firstly, you of course can’t do this retrospectively.
However, if you’re thinking it sounds like you’d have got away with it had you only been more reckless and extracted every penny as you went along, it’s not that simple.
In that situation, the company would have had negligible assets, then HMRC launched the enquiry. It’s suddenly insolvent (due to the contingent liability). An MVL is of course then not an option.
But maybe you’re thinking “That’s fine, I’ll just go for a CVL. Sorry HMRC, the company unfortunately has no money, you won’t get paid.”
With claims like the MSC ones mentioned above, there are clear laws enabling HMRC to transfer the liability to you personally.
Even without that, you may have committed a number of offences under the insolvency legislation, which could lead to being personally liable for the debt, and leading to you being disqualified from acting as a company director.
Unless you are also going to look at personal bankruptcy, the claim will need to be settled one way or another.
Not really, at least in our opinion.
Low-cost operators like MVL Online will only take on simple solvent cases. Where there’s a known open HMRC enquiry, we therefore wouldn’t assist.
Other liquidators may be happy to take the case on. As above though, this won’t solve the problem for you. It just involves someone else, increasing costs accordingly.
Where there’s an open HMRC enquiry, your company in effect has a legal dispute with a creditor. Appointing a liquidator changes who legally controls the company…so what, it still has a creditor dispute.
Instead, you need to focus on resolving the dispute. That could be paying HMRC everything they demand, or it involves appealing the claim. The latter is the appropriate route where you believe the claim is invalid. Unfortunately it may take years to resolve, with you and your company in limbo until resolution.