Clarity on Distributions in Specie and S455

The following article appeared on Jeremy's LinkedIn page in December 2018 and offers an insight into the distributions in specie debate which shareholders may find informative.

2018 has been the year of the phantom in-specie distribution tax case. I have read a large number of articles peddled by those who, quite frankly, should know better, that HMRC were raising a legal challenge to clarify (minimise!?) the acceptable practical process of companies entering liquidation with balance sheets containing only loans to shareholders.

I looked a few times and could never find this case, but now, as we look forward to 2019 we can at least see which way HMRC's policy is heading:

Distributing loans in-specie to shareholders is acceptable! But, in certain circumstances arising from the interaction between statutory interest and the repayment of debts due at future times, material savings can be made by letting the Insolvency Practitioner hold the money, at least initially.

S455 is now the battleground of choice for HMRC. Most in this area will have come across these charges which are levied on companies with loans to Directors which are still outstanding nine months after the end of an accounting period. So where the period between the last accounting period and the commencement of the liquidation is more than nine months, then a sneaky s455 charge may intervene under the radar.

This leaves us with an unsecured claim to HMRC as at the date of liquidation which might well dissipate within nine months of the liquidation commencing. (A beautifully HMRC engineered storm in a tea cup!)

I can confirm that this firm will not be requesting our clients to stump up the S455 charge under their indemnity (unless of course, for some reason, the dissipation does not occur as expected) a position we have come to after speaking to an HMRC CT Inspector.

So what happens once the claim is reversed?

The CT Inspector we spoke too wasn’t too sure either. We could both see a statutory interest for nine months argument (although it was me that raised it) but neither of us could think of any other charges or penalties that might accrue.

For the moment therefore we will be passing onto our clients that the most likely worse case scenario is statutory interest on the debt for nine months plus a few hundred quid from us in acting as a post box as the wheels of CT administration turn inexorably to their natural conclusion.

I say most likely because as our erstwhile Inspector wasn’t sure, given the lack of technical expertise within HMRC (VAT aside!) that most in the CT team would necessary get the Statutory Interest point for a while, and certainly not on smaller cases!

If you are reading this at all and particularly after about March 2019 please remember that Frost Group cannot provide tax advice. I specify March 2019 because this area of HMRC policy is clearly developing and there is some large scale event apparently happening around that time as well.

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Jeremy Frost

CEDR Accredited Mediator & Licensed Insolvency Practitioner

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