Members' voluntary liquidations in Scotland

HMRC has asked us to pass this information onto those of you who deal with Scottish MVLs.

Introduction

In February 2018, HMRC issued a note about Members’ Voluntary Liquidations (MVLs).  That note contained some incorrect statements about the position in Scotland and the purpose of this paper is to provide clarification of HMRC’s interpretation of relevant legislation.

References are to current legislation:

  • Insolvency Act 1986 (“the Act”) and
  • Insolvency (Scotland) Rules 1986 (“the Rules”)

Declaration of solvency

Section 89 of the Act applies in Scotland.  A company’s directors are required to make a declaration of solvency expressing the opinion that the company will be able to pay its debts in full, together with interest at the official rate within 12 months from the commencement of the winding up.

Interest

The declaration of solvency must provide for payment of interest at the official rate. HMRC’s note of February 2018 said that section 89 of the Act refers to section 251 for a definition of the official rate.  We went on to say that section 251 directs the reader to section 189.

We next said that section 189(5) of the Act points the reader to Rule 4.66(2)(b) of the Rules.  Our conclusion was that the official rate applicable to MVLs in Scotland is 15%.  That conclusion was made in good faith and, indeed, follows standard text on the subject.

It has since been pointed out to us that Schedule 2 to the Rules sets out the provisions of Part 4 of the Rules which, subject to modifications, apply to MVLs.  Rule 4.66 is not among the provisions noted in Schedule 2 and so does not apply to MVLs.  We are sorry about any confusion caused by our earlier note.

Since the 1986 Rules do not provide for an official rate payable to creditors in an MVL, a creditor’s entitlement to post-liquidation interest is the rate of interest applicable to the debt apart from winding-up: section 189(4)(b) of the Act. Interest at that rate runs until full payment of the principal debt. 

Discounting future debts

It is possible some debts may be payable after the date of MVL. Most likely is Corporation Tax which is payable nine months and one day after the end of a company’s accounting period. There may also be, for example, PAYE or VAT due if a company has traded up to the date of MVL.

In our earlier note we referred to Rule 4.16E of the Rules.  This Rule provides for a debt payable after the date of liquidation to be discounted and our note indicated our understanding that it applied to MVLs.  However, similar to the interest question discussed above, Schedule 2 to the Rules does not apply Rule 4.16E.  This means, then, that debts payable after the date of MVL may not be discounted but must be paid in full, even if payment is made before the due date for payment.  

 Conclusion

  • All debts due by the company at the date of MVL must be paid.
  • Debts incurred before the date of MVL but payable after MVL must be paid in full without discounting.
  • If CT is paid 10 months after the accounting period end, then only one month interest is payable at the HMRC interest rate *. However if CT is paid 8 months after the accounting period end, (ie before the normal due date of 9 months and 1 day) then no interest is payable.

    Example

    MVL date: 31/01/2018

    Normal Due date

    Claim Amount

    Date paid

    interest

    Total payable

    Discount

    01/11/2018

    £1000

    30/06/2018 paid before  the due date

    Not due

    £1000

    N/A

    01/11/2018

    £1000

    01/12/2018

    Paid after the due date

    Due from 01/11/2018 to 01/12/2018 at prescribed interest rate

    £1000 +£2.67 (claim +Interest)

    N/A

     

    *HMRC late payment interest rate after 21 August 2018 is 3.25% 

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