Solvent liquidations tripled in the run up to April’s tax changes

March saw a record number of solvent companies being liquidated as directors looked to cash-in before tax changes were introduced that could have potentially tripled their tax bills.

According to figures released by Companies House, there were 2,663 solvent liquidations in March. This was almost triple the previous record figure of 992, which was recorded in April 2015.

The primary cause was a change to the tax rules that was introduced at the start of April. From 6 April 2016, directors who wind up a solvent company are no longer eligible for Entrepreneurs’ Relief at a rate of 10% on capital gains if they continue to work in the same trade in the next two years.

Dividend taxation has also been raised to 38.1%. The measures have been introduced in an attempt to prevent individuals from avoiding income tax by ‘storing up’ profits in one company before winding it up and paying a reduced rate of capital gains tax before starting again with a  new company. HMRC expects the reforms to bring in an additional £35m in 2017-18.

Insolvency practitioners’ body R3 had previously spoken of the possible unintended consequences of the rule change, especially as it pertained to entrepreneurs approaching retirement. One problem they outlined was that those who wound up their companies but passed on or sold the business often remained involved during the handover process, in an advisory or consulting capacity.

This could have left them falling foul of the part of the rule that states they cannot claim Entrepreneurs’ Relief as they would effectively be continuing to work in the same trade within that two year period. This, says R3, could have seen a number of entrepreneurs in this category adding to the solvent companies opting for early liquidation.

Both Companies House and R3 said the spike in solvent liquidations was higher than expected. Solvent liquidations accounted for two thirds (66%) of all liquidations in March, compared to an average of just over a third (35%) over the past 2 years.

By Phil Smith

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