Following the cases involving Lehman Brothers in 2016 HMRC have changed their policy on statutory interest charges imposed where companies go into members’ voluntary liquidation. Interest is now being charged by HMRC from the start date of liquidation until payment is made. A charge arises not only on debts that are due at the start of the liquidation but also on contingent and future debts. So far the taxes we have seen this being applied to have been corporation tax and VAT, however, no doubt HMRC will seek to impose this to PAYE and NIC.
HMRC are automatically issuing penalty notices once liabilities are known to them. It would be advisable for companies and their advisors to be prepared, by making payments on account to HMRC well in advance, to avoid the increased interest charges.
One practical difficulty is that the final VAT return cannot be completed online and so the company would have to wait for HMRC to issue a paper return, which can take four weeks to be posted out.
Discussions on statutory interest charges started in 1993 when the then Chancellor of the Exchequer, Mr Kenneth Clarke spoke of the Government’s concern over the ‘havoc’ on small businesses from late payments. A consultation was published in November 1993 on late payment of commercial debt. The European Parliament had also assisted by consulting on payment practices and the interactions it would have with other EEA/ EU countries. Legislation came into force on 1 November 1998; known as ‘The late payment of commercial debts (Interest) Act 1998.’
Statutory interest charges under the 1998 legislation were not mandatory, but became part of implied terms if they had not been expressed, and could apply in all contracts, goods or services, other than excepted contracts. It applied to all those acting in the course of a business, which included any government department or local or public authority.
In order for statutory interest to be charged a debt must exist where the obligation was under a contract. The late payment of commercial debts (Interest) Act 1998 states that:
‘A debt does not carry statutory interest if or to the extent that it consists of a sum to which a right to interest or to charge interest applies by virtue of any enactment (other than section 1 of this Act).’
However, this can be overridden by a court, arbitrator or arbiter that could award interest on it. That said, where there are any rules of law that exist to grant a right to demand interest, the debt will not carry any statutory interest.
HMRC changes have their policy by reference to clause 2.88 of the Insolvency Rules 1986, which states that interest can be charged from the date the company first went into administration or liquidation. The 1986 legislation was replaced by the Insolvency Rules 2016 which came into effect on 6 April 2017.
The new 2016 rules under 14.23 broadly follow the 1986 legislation, in particular confirming the start date as the start of liquidation. This is because any tax liabilities would be provable at the date the company goes into voluntary liquidation. It is notable, however, that the 1998 legislation and underlying reasons for introducing the interest charges appear to have been completely ignored.
Whenever a company enters a members’ voluntary liquidation, the shareholder should ensure that they take into account the impact of statutory interest on all tax liabilities, even those that have not yet fallen due. Liquidators will also need to ensure that they do not over-distribute funds to shareholders by overlooking these charges. The liquidator should ensure that tax liabilities are paid as soon as possible, or that a tax deposit certificate is purchased to stop statutory interest from running.
If, tax is paid to HMRC after the ‘normal’ due date, interest would be charged at 3%. Where a company is in members’ voluntary liquidation, 14.23 states that if there are any outstanding debts after the relevant period, the rate of interest will be the greater of statutory interest and rate applicable to the debt if outside of liquidation (currently 3%). This means that the rate remains at 8% and would therefore not revert back to 3% after the ‘normal’ due date.
For further information and help on this case and termination payments, please contact the TaxDesk on 0845 4900 509 and ask for Reshma Johar.