For solvent companies, the issue of whether to pursue a formal liquidation or apply to be struck off can be influenced by the tax treatment of any distributions made during the winding up process.
Generally, distributions paid to shareholders will be taxed as dividends chargeable to Income Tax, which may be subject to effective rates of 0% for basic rate taxpayers, 25% for higher rate taxpayers or 36.11% for those paying tax at the additional rate, where the payment is made before the commencement of a liquidation. Following the Summer Budget, from April 2016, the effective dividend tax rates will increase to 7.50% for basic rate taxpayers, 32.50% for higher rate taxpayers or 38.10% for those paying tax at the additional rate, subject to a £5,000 tax-free dividend allowance.
Distributions paid during the liquidation process will be treated as capital receipts in the hands of the shareholders, and will attract Capital Gains Tax rates of 18% for basic rate tax payers and 28% for those who pay tax in the higher and additional rate bands, not to mention the £11,100 (2015/16) capital gains Annual Exemption which is less likely to be used in comparison to the income Personal Allowance. Once the effective dividend tax rates increase in April 2016 there is a clear saving here for higher and additional rate taxpayers. If the shareholder has worked for the company, which needs to have carried on a trade, and owned more than 5% of the shares for at least one year, the Entrepreneurs’ Relief rate of 10% will apply. Liquidation can, however, be a costly procedure by the appointment of a licenced insolvency practitioner and running into thousands of pounds for the average company.
There is a cost effective alternative for companies with a low amount of net assets. Section 1030A Corporation Tax Act 2010 enables distributions of up to £25,000 to be treated as capital payments for companies intending to be or which are in the process of being struck off under Section 1003 Companies Act 2006, without the need to commence a formal liquidation.
Another advantage from an administrative point of view is that there is no need to seek a clearance from HM Revenue & Customs beforehand; the entitlement is automatically available.
There are conditions attached to this concessionary treatment which are that there must be an intention, at the time of making the distribution, for all of the debts payable to the company to be repaid and all liabilities settled. Furthermore, any distributions paid in excess of the usual dividend policy in the lead up to such proceedings may be construed as being made in anticipation of the striking off and therefore, HM Revenue & Customs may seek to factor these in to the £25,000 limit.
The threshold is de minimis and any distributions deemed to have been paid alongside the intention to strike off which bring the total in excess of this will mean that all of the distributions will be income dividends and capital treatment will not be able to be claimed by the shareholders.
There is also a 2 year time limit for the company to dissolve, and recoup all sums due to it and pay off all of its creditors. Failure to meet these requirements within this timescale will result in the previous capital treatment being withdrawn.
So for smaller, solvent companies at the end of their life, you may be able to have your cake and eat it, with zero liquidation costs and, from April 2016, the benefit of lower tax rates for shareholders with higher incomes.
