Closing down a business does not have to be a sign of company failure. It is perfectly possible that a business has come to the end of its useful economic life quite naturally. People retire. Legislation change can close down certain markets for goods and services. Certain businesses whilst successful in providing their owners with a good standard of living may not be attractive to a purchaser and need winding up.
However, financial failure is undoubtedly a cause of winding up a business. Part of the concluding process will involve costs and that means HMRC taxes may feature.
When Closing A Company Does Tax Automatically Get Charged?
When closing a company, tax will frequently arise, particularly if there is a distribution of company assets that are converted into cash or to the shareholders as part of the winding up process or even as a distribution in specie. Tax in general terms is normally levied when someone benefits or makes a gain from a transfer of assets.
If however, a company is insolvent so the shareholders are not entitled to any distributions with the creditors ranking ahead then the tax implications will be likely far fewer (if at all). However, the winding up of a company by putting it into liquidation will involve costs.
Tax In A Members Voluntary Liquidation
Members Voluntary Liquidation is a process approved under the Insolvency Act 1986 used to winding up order up a solvent company
Its utility really kicks into effect if a company has more than £25,000 of assets. The assets available for shareholders net of costs when distributed by a liquidator can be treated as a capital gain. This may be more attractive and tax efficient than alternatively distributing the assets of the company by way of dividends which is treated as income which may lead to a higher tax burden for the shareholders. In addition, tax reliefs may be available such as Business Assets Disposal Relief (“BADR”), previously known as Entrepreneurs Relief.
Subject to a shareholder’s personal tax position BADR may enable them to pay tax as low as 10% on the distribution they receive from the liquidator in a Members Voluntary Liquidation. However, this relief is limited to £1million.
Tax On Dissolving A Company
An alternative approach to closing a solvent company is via what is known as company dissolution or strike off
Although procedurally it may not enable a shareholder to claim reliefs such as BADR it is nevertheless capable of being a very cheap procedure by filing a DS01 form at Companies House. It can cost as little as £8.
It is not usually suitable for deployment when a company is insolvent but if a company has ceased trading and satisfies the requirements set out in the DS01 form then it can be an effective way to wind up a company.
Assets remaining in the company after it has been dissolved will be in effect lost to the Bona Vacantia / the Crown except if the company were then to be reinstated which an enable them to be reclaimed.
The disadvantage of dissolution as opposed to a Members Voluntary Liquidation is that the shareholder that receives assets from the company will likely be subject to a higher tax burden based on income tax rates as opposed to capital gains tax rates. If there are few assets then it can be a cost effective process as the costs of a Members Voluntary Liquidation will be higher.
Tax In A Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation is by far the most common and sought after method for winding up an insolvent company.
The process is an orderly winding up so that a company that needs to stop trading (as it might be at risk of Wrongful Trading for example only) can deploy a legal procedure in which a liquidator is appointed (who must be an Insolvency Practitioner). The liquidator acts instead of the directors who lose their powers under Section 103 of the Insolvency Act 1986.
The assets will be realised and usually converted into cash and then any surplus after costs of liquidation are available to be distributed to the creditors. There is a statutory order of payment in insolvency proceedings that determines how the realisations in liquidation are to be paid over to the interested parties.
Upon the company being fully liquidated it will then be struck off at Companies House.
As it will be relatively rare for shareholders to be able to receive a distribution from the assets available in the company and as a result there will not likely be direct tax implications. However, shareholders should take their own professional advice based on their own circumstances applicable to them.
However, if the company’s insolvency is itself due to HMRC tax liabilities then the directors should take a proactive approach to obtaining advice as to the correct and proper way forwards for the company.
