Closing Your UK Subsidiary Overview
How to go about closing your UK subsidiary company is relevant to organisations whose main or parent trading companies are based overseas and looking to pull out of the UK.
If you have decided your UK subsidiary is unviable, or if you consider it a drain on your main business overseas, or it is insolvent or simply have had enough of the consequences of Brexit, then steps can be taken to wind down the UK business.
There are five ways in which you can close down your UK subsidiary company that will largely relieve you of the burden of having a UK company. Three of those options involve Liquidation but it may alternatively be possible to strike off the company from the register at Companies House without formal Insolvency Act 1986 procedures having to be used.
Striking Off A UK Subsidiary Company
Striking off a UK subsidiary company is an approach available for a solvent company that is reasonably cheap and quick to implement. The technical name for striking off a company is dissolution.
It is not necessarily the most tax efficient approach to closing your UK subsidiary. It is not really suitable if your subsidiary in the UK is insolvent with employees who would otherwise be entitled to redundancy payments from the Redundancy Payments Service were the company to go into insolvent Liquidation.
Although it is not really the procedure for a company with debts it is possible to use it provided creditors are properly notified. It is an offence however to strike off a company without providing the required notice to its creditors.
Consequences Of Striking Off A UK Subsidiary With Debts
Not only is it an offence but creditors can object and issue a Winding Up Petition to put the company into Compulsory Liquidation. It is also possible for a creditor to restore a company and have it placed into Liquidation even after it has been dissolved.
The Insolvency Service (a government agency) now has the power to investigate the conduct of Directors of dissolved companies. Director disqualification proceedings for unfit Director conduct can result in bans of up to 15 years. And the Secretary of State can apply to the Court for a Director Disqualification Compensation Order if they consider a Director’s conduct has unreasonably caused loss to creditors.
As a result, it is not recommended to attempt to strike off a company with debts but instead deploy the appropriate Liquidation procedures (see below).
Preparing Your UK Subsidiary For Closure
In order to strike off your sovlent UK subsidiary there is preparation required to take a company from being a trading business to the point where you can use the DS01 form to strike off a company.
The aim is to wind down the UK subsidiary company’s affairs so that before you file the DS01 strike off form, you can close down the bank account and drain down any residual balances. Do not close the bank account before you have concluded other matters detailed below.
Customers And Suppliers
In order to enable the UK subsidiary company to be wound up the starting point is to cease it providing goods and services. This will reduce the need for your UK subsidiary to incur expenses in order to provide these goods or services. However, do not terminate your supply contracts until you have ensured your last orders have been processed so that you do not need to source new supplies at conceivably less advantageous rates.
Upon completion of the final sales orders, you can then pay off the suppliers still owed money and put them on notice that you are no longer trading.
Ensure all liabilities are calculated, including any contingent liabilities.
Realising The Assets
Instruct agents or auction off the remaining assets of the subsidiary company to turn them into cash or distribute them in specie to shareholders (if the company is solvent) after making the required corporate disclosures.
Employees
All employees will need to be made redundant. Therefore calculations should be worked out in respect of any liabilities for redundancy, arrears of pay, notice pay, holiday pay and pension contributions.
The pension provider with whom the company has auto-enrolled will need to be notified of the closure of the pension scheme.
HMRC Notifications
HMRC needs to be informed about the closure of the PAYE scheme so that you can stop being an employer.
Additionally, your UK subsidiary is likely to be registered with HMRC for other taxes such as VAT and corporation tax.
Once you have completed your last orders you can deregister for VAT and submit your final VAT return.
Corporation tax finalities will require a set of cessation accounts to be prepared to accompany the final Corporation Tax Return (CT600).
Liquidating A Solvent UK Subsidiary (Members Voluntary Liquidation)
If your UK subsidiary company is solvent then a formal procedure set out in the Insolvency Act 1986 known as Members Voluntary Liquidation (“MVL”) is available to it as a means of closing it down.
A Members Voluntary Liquidation is a procedure that involves the winding up of a company by passing a Resolution for it to be wound up. It involves the appointment of a Liquidator who will take over control of the company from the Directors.
The Directors need to swear a Statutory Declaration of Solvency which affirms the company is able to pay its debts within 12 months of commencement of the Liquidation. This document is to be supported by a Statement of Affairs which details the company’s assets and liabilities.
The aim of an MVL is to organise an orderly winding up of the UK subsidiary by realising the assets and paying off any liabilities. To ensure all creditors have the opportunity to claim it is a requirement that an advertisement is placed in the Gazette.
It will be necessary to finalise the company’s tax affairs by obtaining HMRC clearance and then distributing the assets as required by Section 107 of the Insolvency Act 1986 to the shareholders.
There are potential tax advantages of placing a UK subsidiary company into MVL as opposed to using the strike off procedure to close it down because any individuals who are subject to UK tax such as shareholders based in the UK may be able to take advantage of Business Asset Disposal Relief (formerly known as Entrepreneurs Relief). There are potentially favourable rates of Capital Gains Tax that could apply to distributions received by shareholders as opposed to being treated as income.
Dormant Company
As an alternative to the dissolution of a company, instead, your UK subsidiary could be left as a dormant company.
A dormant company is one that does not trade but which will still exists on the register at Comapnies House. You would still need to file Acounts and a Confirmation Statement each year. It is likely HMRC would relieve you of the need to file a Corporation Tax return.
The advantage of using the dormant company approach is that if you decided to restart trading your UK subsidiary, you would have a company readily available to you. The disadvantage of this approach is the absence of finality with a legal entity still existing in your company portfolio for which filing responsibilities would remain an annual burden.
Liquidating An Insolvency UK Subsidiary
If your UK subsidiary company is insolvent then there are two procedures available to liquidate the company:
- Creditors Voluntary Liquidation
- Compulsory Liquidation
Creditors Voluntary Liquidation
The Credtiors Voluntary Liquidation procedure is available to close down a UK subsidiary company that is unable to pay its debts when they fall due or otherwise insolvent because its assets are exceeded by its liabilities.
As with an MVL, Creditors Voluntary Liquidation is a form of Voluntary Liquidation that enables an orderly winding up of a UK company by a Liquidator. Creditors are losing out because they will not in the vast majority of cases be paid in full. Therefore the Liquidator’s role is to act in the interests of the creditors as a whole.
The process is initiated by the Directors of the UK subsidiary and approved by way of a formal Resolution of the shareholders. A Liquidator is appointed and confirmed by the creditors at a Decision Procedure convened in accordance with Chapter 2 Part 15 of the Insolvency (England and Wales) Rules 2016.
Creditors Voluntary Liquidation has a number of similarities to the MVL process but for routine closing of a UK subsidiary the notable difference (apart from typically being more expensive to an MVL) will be the need for the Liquidator to do a report on the conduct of the Directors to the Insolvency Service. This can trigger an investigation and even in some cases Directors’ disqualification. An option therefore might be instead for the overseas parent company to inject sufficient funds into the UK subsidiary to make it solvent.
Compulsory Liquidation
A Compulsory Liquidation is a Liquidation that arises from an Order of the Court following a Winding Up Petition being served on the company.
Normally it is a procedure initiated by creditors who have debts owing to them that are going unpaid. They are entitled to petition for the winding up of such a company to force it into Compulsory Liquidation. Although the procedure is not intended to be used as a debt collection exercise it is nevertheless commonly deployed to elicit payment and this often succeeds.
However, it is a process that a UK subsidiary company (or its Directors) can initiate themselves pursuant to Section 124 of the Insolvency Act 1986 to close down the company.
In accordance with Section 143 of the Insolvency Act 1986, in a Compulsory Liquidation, the Liquidator winds up the company by realising its assets. Any surplus after the costs and expenses of the Liquidation have been paid is then distributed to creditors before the company is struck off as part of the closure.
In the first instance upon the making of the Winding Up Order by the Court for Compulsory Liquidation, a government official called the Official Receiver will be appointed to act as the Liquidator.
Investigations into the conduct of the Directors in cases of Compulsory Liquidation will be undertaken by the Official Receiver.
It is possible for creditors to replace the Official Receiver with an Insolvency Practitioner from the private sector.
When considering to opt for compulsory or voluntary Liquidation to close down an insolvent UK subsidiary you can look at the advantages and disadvantages of each in our article Compulsory v Voluntary Liquidation.
