What is ‘moneyboxing’ in company liquidation?

Question

What is ‘moneyboxing’ in company liquidation?

Answer

Moneyboxing refers to the act of holding profits within a company’s books, deemed excessive to its commercial needs, with the sole intention of gaining a tax advantage on the eventual closure of the company.

HM Revenue and Customs have expressed concern about the use of this process, viewing it as aggressive tax planning, and unfair to other tax payers who cannot make the same type of arrangement.

For this reason, if you are closing down your company via a Members’ Voluntary Liquidation (MVL), HMRC will look carefully at the reasons for closure, and attempt to identify whether moneyboxing has taken place.

One of the problems facing HMRC is the ability to define ‘excessive’ retention of funds in each case, as working capital requirements vary greatly between businesses. There is a danger that directors are simply erring on the side of caution with their working capital, rather than deliberately trying to gain a tax advantage, could be wrongly accused.

HMRC have introduced a safeguard whereby income tax will have to be paid on any distributions from a closed company if a shareholder becomes involved in a similar trade or activity within two years of that closure.