In these uncertain economic times, as a business owner you may feel that your company cannot continue to trade; your company may be on the brink of being forced into compulsory liquidation by your creditors or you may have identified that your company is insolvent and unfortunately does not have a future. Alternatively, you might be considering retiring early or taking up employment elsewhere. In any case, closing down your company may be an imminent reality. This blog will look at three different options available for doing so and the tax implications of each of these.
1. Creditors’ Voluntary Liquidation (“CVL”)
A company is usually placed into CVL when it is insolvent or about to become insolvent and the directors have voted that it should be wound up and dissolved. As part of this, a liquidator is appointed to take control of the company assets. The liquidator will sell the company assets and after deducting the costs of liquidation, a payment is made to creditors. The company will then be dissolved.
From a tax perspective, there are not many options available for the company in terms of tax planning in a CVL. However, the company can help the liquidator to reach an agreement with HMRC in relation to any outstanding tax liabilities.
2. Members’ Voluntary Liquidation (“MVL”)
A company is usually placed into MVL when it is still solvent. As part of this, a licensed insolvency practitioner is appointed as a liquidator. The liquidator will then sell the company assets, settle any creditor claims and distribute any surplus funds to the shareholders/members.
There may be certain tax benefits for shareholders/members in an MVL. These are as follows:
- Capital v Income Distributions
When reserves are distributed as part of an MVL, these are typically classed as capital distributions as opposed to income distributions. This means that they are subject to Capital Gains Tax, as opposed to Income Tax. As the Capital Gains Tax rates are lower than Income Tax rates, a lower amount of tax is due on the distributions.
- Entrepreneurs’ Relief (“ER”)
A disposal of all or part of a business may also be eligible for ER. If this is applicable, any capital distributions made by the liquidator to the business owner will be taxed at the lower rate of Capital Gains tax of 10%. It is important to note that, there are strict conditions which must be met in order for ER to be available: for example, the business owner must have owned the business for at least two years prior to the beginning of the MVL. Moreover, the reserves must be distributed within three years of the company ceasing to trade. Please see our previous blog for details of all of the conditions which must be met.
3. Informal Striking Off
A company can also be informally struck off from the Register of Companies. This is much less formal than a liquidation and the director(s) can apply for a company to be struck off through Companies House, the process costing just £10. If the application is successful, the request will be posted in The Gazette and the company will then be struck off the register.
This is beneficial in terms of tax planning for smaller companies with net assets of up to £25,000. This is because a distribution of up to £25,000 under the striking off process is treated as a capital distribution for tax purposes. Therefore, the lower rates of Capital Gains Tax are applicable and ER may be claimed if the relevant conditions are met.
However, it should be noted that this £25,000 limit applies on an all-or-nothing basis. This means that if any part of a distribution exceeds £25,000, the whole amount will be treated as an income distribution. For example, if a company makes a distribution of £30,000 to its sole shareholder, as this amount exceeds £25,000, the full amount of £30,000 will be treated as an income distribution.
Furthermore, if unusually large dividend distributions are made in anticipation of an informal striking off in order to reduce the net assets to below £25,000, HMRC will consider these previous distributions as part of £25,000. Therefore, if the total distributions are in excess of £25,000, they will all be treated as a distribution of income.
Anti-Avoidance Rules
Please note that HMRC have introduced rules to prevent the avoidance of tax in dissolving a company. The rules (known as the “anti-phoenixing rules”) apply where a company is dissolved and then the same trade or a similar trade is carried on and it is reasonable to assume that the main purpose (or one of the main purposes) of the winding up was to avoid or reduce a charge to Income Tax.
However, if you are legitimately closing down your business, these rules should not be applicable to you.
Further Guidance
If you are considering closing your company and are still unsure about your options, please contact us. We have worked with a number of clients in this position and we were able to ensure that they could close down their companies in the most tax efficient manner.
Related Articles
https://pd-taxconsultants.co.uk/budget-2018-entrepreneurs-relief-alphabet-shares/
https://pd-taxconsultants.co.uk/introduction-of-targeted-anti-avoidance-rule-taar/
https://www.stratostax.co.uk/insights/winding-back-on-winding-up-payments/
