Guide To Tax on Winding-Up a Company

The procedure for shutting down a limited company is unfortunately never as easy as the procedure for setting one up.

The Implications

There are tax implications to consider as well as issues of redundancy, distributions of assets to be made, and the matter of dealing with any and all of the company’s debtors and creditors.

Position of Shareholders

Whether the company has many shareholders or just one or two, the way in which the assets are distributed will have impact on the personal tax obligations for each of them. If there are surplus assets it will be beneficial for the assets to be divided by way of a capital gain as opposed to a distribution by way of dividend in order to enable the shareholders to take advantage of the exemptions and reliefs offered by way of CGT.

Process

The appointment of a licensed insolvency firm in order to deal with the assets and liabilities is the most common way in which a company can formalise the distribution of the assets, however this can be expensive.

Alternatively there is an informal procedure that can be employed, which is a HMRC concession called Extra Statutory Concession C16 (ESC C16). This negates the need to appoint a liquidator by allowing the distribution of any cash or assets remaining in the company to the shareholders as capital for which CGT is payable.

The Extra Statutory Concession route

However, in some cases there will be no tax to pay as the gain will be covered by the individual’s annual capital gains exemption which for 2008/2009 is £9,600.00.

In order to utilise the Extra Statutory Concession HMRC will want the following assurances to be made by both the company’s officers and its shareholders:

That the company:

• Has no intention to trade or carry on its business at any time;
• Will procure the payment of its debts;
• Will ensure it is able to pay off its creditors;
• Will distribute any balance of its assets to its shareholders; and
• Will inform Companies House and ask that the company be struck off the register of companies.

Further, both the shareholders and the company must agree to:

• Submit to HMRC all information required to determine the existance of any tax liabilities, i.e. company tax returns and accounts;
• Ensure the payment of any corporation tax due on income or chargeable gains; and
• If the Shareholders receive any distributions out of the company that they will personally agree to pay any and all tax due in respect of these amounts.

Qualifications to the Extra Statutory Concession

Although the Extra Statutory Concession can be a cost effective way of closing down a company, it is only possible to use it if there are no live claims against the company. Aggrieved creditors of the company can not only object to the company being struck-off, but can also request that the company be reinstated if it has already been struck-off.

Thus a formal liquidation, though arguably more expensive, will be the better method of winding up the company if the company believes it could face claims by creditors.

Contact our corporate and commercial law experts today

If you would like advice on how to set up a new business in the UK or relocate your business to the UK, talk to our experienced corporate or commercial solicitors. Call us today on 01895 207264 or email corporate@ibblaw.co.uk.