Once a limited company has run its course and fulfilled its usefulness it may be time for it to be dissolved. This then raises the question of what is the most tax-efficient way to do this?
There are normally two methods used for winding up companies, namely:
Members’ Voluntary Liquidation (MVL)
This is a formal procedure under the Companies and Insolvency Acts and can only be carried out if the directors can swear an affidavit to the effect that the company is solvent and all creditors will be paid in full. A liquidator is appointed (who must be a licensed Insolvency Practitioner) to carry out the prescribed scheme of liquidation.
Striking off under Section 1003 Companies Act 2006
This method can be used where a company share capital is relatively low and there are no significant legal risks that need to be taken into account to protect the interests of the directors/shareholders. If the level of share capital is significant (perhaps over £1,000) the Crown can seize assets to the value of the shareholders’ capital under the law of “bona vacantia”. If there is any risk of future claims by creditors it is usually better to carry out a MVL so that interests of such third parties can be dealt with on a proper legal footing without jeopardising the position of directors/shareholders.
However, assuming all necessary preparatory work is carried out, a striking off can be much less expensive in terms of administration costs if there are no complications as mentioned above. Beware, any unpaid creditor can make an application to the court to restore a company if they make an application within 20 years of the date of dissolution!
It is important to note the method by which the distributions made to the shareholders can be treated as liable to capital gains tax (CGT) rather than income tax.
If a company is wound up through a formal liquidation, then any distribution made after the appointment of the liquidator would normally be liable to CGT rather than income tax. However, if a company is struck off then “capital” treatment does not follow automatically (subject to the “phoenixing” anti-avoidance rules mentioned below). However, capital treatment can apply if the company assets are not worth more than £25,000 and it:
- does not intend to trade or carry on business in future; and
- intends to collect its debts, pay its creditors and distribute assets to shareholders; and
- intends to seek striking off or dissolution
and the company and its shareholders must agree:
- they will supply information about tax liabilities to the HMRC; and
- they will pay CGT on any distributions made during the winding-up
Once CGT treatment has been secured it will be possible to look at reliefs such as entrepreneurs’ relief. However, recent changes regarding restrictions on CGT for “phoenixing” will need to be considered, which is a topic of its own.
As with all such tax situations, advice should also be sought before proceeding. For further details contact us.