Nichola Ross Martin's Tax Consultancy

When a company ceases trading it can be:

• Dissolved and struck off the Companies Register.
• Wound-up by a liquidator in a compulsory or voluntary liquidation.
• Left dormant.

The advantages of each depend on the circumstances.

Striking off

Striking off is the process in which a solvent company is dissolved and struck off the Companies Register.

The directors form DS01 to apply for striking off.

All assets should be transferred out of the company before it is struck off. All liabilities must be settled.

• If the company retains any assets including share capital these will become Bona Vacantia and the property of the Crown when it is struck off.
• The 2006 Companies Act allows a simpified Capital Reduction procedure to repay share capital and non-distributable capital reserves to shareholders. It is illegal to distribute capital otherwise.
• A Capital Reduction is essential if the company is to be struck off and has more than a small amount of share capital or capital reserves.
• On making a Capital Reduction, the directors must sign a statement of solvency .
• Where a company has not discharged all its debts or is insolvent when it is struck off, it may be returned to the Register. The directors may be held personally accountable to its creditors.

HM Revenue & Custom's (HMRC) Extra Statutory Concession C16 can be used to ensure that all distributions made on winding up are treated as capital for tax purposes. It is anticipated that this concession will be withdrawn in Autumn 2011/Spring 2012.

Liquidation

• Liquidation is a process by which a company is wound up by a licenced insolvency practitioner.
• Once wound up the company is removed from the Register.
• Liquidation is generally more expensive that striking off because liquidators are generally fairly expensive to engage.
• Liquidation is the recommended way to wind up a company if its affairs are complex.
• It is often unavoidable when a company becomes insolvent.
• Once wound up a company cannot be restored to the Register for more than two years.

Remaining dormant

• A company may be left dormant with or without assets.
• It will still be required to file accounts and complete an Annual Return with Companies House.
• HMRC will require the company to notify it of its dormant status, otherwise the company will have to continue to file Corporation Tax Returns.
• Once a company ceases trading and becomes dormant its shares lose potentaily lose status as business assets this may affect Capital Gains tax (CGT) relief and Inheritance tax (IHT) reliefs for shareholders.

Extracting profits from the company

Dividends

If the company executes a capital reduction to distribute capital reserves funds may be passed to individual shareholders as dividends. This will suit basic rate taxpayers. Higher rate taxpayers will prefer to receive capital if possible.

Distribution on liquidation or striking off

• A distribution made on liquidation is treated as capital.
• If HMRC ESC C16 applies a distribution made on striking off will also receive capital treatment.
• Provided that qualifying conditions are met, Capital Gain Tax Entrepreneurs' Relief may apply to capital distributions received by directors or employees.

Purchase of own shares 

• It is normally not be possible to execute a purchase of own shares if the company is known to be ceasing trading: the purchase will not serve a trade purpose and HMRC is unlikely to grant clearance.
• A purchase of own shares may be combined with a capital reduction: again it would be expected that the company would continue to trade for a period after this on order to satisfy HMRC of a trade purpose to the transaction. See Purchase of own shares/capital reduction checklist.

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