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Where Taxpayers and Advisers Meet

MVL with overdrawn director’s loan

Radge70
Posts: 7
Joined: Sat Mar 03, 2018 12:41 pm

MVL with overdrawn director’s loan

Postby Radge70 » Thu May 10, 2018 11:05 pm

Hi,

I have a limited company where the only asset is (around) £100,000 of overdrawn director’s loans. The company hasn't traded for over 2 years (and won't be in the future) so it has been suggested to me that I should close the company down by doing an MVL and having the loans distributed "in specie", thus benefiting from entrepreneurs’ relief. I have done a bit of research on this and stumbled across a couple of articles that say "HMRC is now running a test case to challenge this approach – seeking to reclassify the distribution of the loan as income rather than capital".

The solution seems to be to repay the loans before the MVL process begins but the problem I would then have would be how to raise the £100,000 that I would need to do so.

One article says "Regardless of the outcome of the test case, the new position seems likely to be enshrined in law when the Finance Bill 2017 finishes its passage through Parliament.".

My questions are, first of all, has this now become "enshrined in law"? If not, and if I were to go ahead without repaying the loans first, would it still be possible for HMRC to challenge what I had done and then reclassify the distribution of the loans as income? Indeed, even if I did repay the loans back first, would there potentially be any comeback from HMRC later down the line?

TaxAdviser2018
Posts: 26
Joined: Tue Apr 17, 2018 1:34 pm

Re: MVL with overdrawn director’s loan

Postby TaxAdviser2018 » Wed May 16, 2018 11:46 am

Notwithstanding the test case, you should repay the overdrawn director's current account (DCA) balance so that the statutory conditions (set out in s458 of Corpration Tax Act 2010) are satisfied in relation to the repayment of the DCA.

The company can then be liquidated. This should provide a degree of protection against HMRC reclassifying the distribution as income.

On the basis that the conditions for Entrepreneurs' Relief (ER) are satisfied, any capital gain should be taxed at 10%. There is a three year period in which to dispose of the shares after the date that the underlying trade ceased in order to qualify for ER. As your company has not traded for over two years, you may need to take immediate action in relation to disposing of your shareholding.

A decision in respect of the current test case could be appealed to a higher court. Therefore it is possible that the law could be amended to treat distributions of an overdrawn DCA as income before the case is ultimately decided.

SteLacca
Posts: 383
Joined: Fri Aug 07, 2015 2:17 pm

Re: MVL with overdrawn director’s loan

Postby SteLacca » Wed Jun 06, 2018 10:29 am

There is likely to be a financial benefit to repaying the DLA, assuming that the company has met its obligations, in that a repayment of S.455 tax will follow, amounting to at least £25,000 and possibly £32,500 (depending on when the DLA became overdrawn).


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