When a company ceases trading it can:

  • Voluntarily apply to be struck off the companies register.
  • Be wound-up by a liquidator under a compulsory or members voluntary liquidation.
  • Continue in existence as a dormant company

The route taken depends on the facts and circumstances of the case. Subscribers CLICK HEREfor your detailed version of this guide.


 Striking off 

Striking off is the process in which a solvent company is dissolved and struck off the Companies Register. It is often known as "dissolution".

  • Striking off is an alternative procedure to a formal liquidation.

Voluntary striking off:

  • The company must be solvent and 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.
  • Capital Reduction procedure with a Statement of solvency may be recommended initially to repay share capital and non-distributable capital reserves to shareholders.

See Striking off a company


Liquidation

  • Liquidation is a process by which a company is wound up by a licenced insolvency practitioner under the Insolvency Act 1986.
  • Liquidation by compulsory order of the creditors is often unavoidable when a company becomes Insolvent.
  • When winding up a company consideration will need to be given each time a distribution is made as to whether the distribution is:

Remaining dormant


Extracting profits from the company prior to striking off

Purchase of own shares 

  • Purchase of own shares is unlikely to qualify for HMRC clearance if made in advance of ceasing trading.
  • 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 in order to satisfy HMRC of a trade purpose to the transaction.

See Purchase of own shares/capital reduction checklist.

Dividends


Distributions made on striking off

  • In the event of striking off up to £25,000 may be distributed as capital for tax purposes. 
  • Provided that qualifying conditions are met, Capital Gains Tax Entrepreneurs' Relief  or Investors' Relief may apply.

Distributions made on liquidation

  • These are taxed as capital unless the TAAR or TIS apply.

Distributions on winding up: TAAR and Transactions In Securities (TIS)

From 6 April 2016 the the Transactions In Securities (TIS) anti-avoidance rules are extended to catch certain distributions on winding up:

  • A repayment of share capital or share premium: TIS tax clearance is now recommended in respect of all repayments of share capital and share premium.
  • A distribution in respect of securities on a winding up.
    • Up to 5 April 2016 a distribution made by a liquidator was not normally treated as a TIS unless it were combined with another transaction such as an issue of shares.
    • Under the new rules tax clearance may well be recommended prior to winding up a company.

From 6 April 2016 A Targeted Anti-Avoidance Rule (TAAR) was also introduced to target ‘phoenixing’.  Broadly distributions on a winding up will be taxable as income if within two years the individual (or someone connected with them) carries on a similar trade or activity.

This expanded definition and TAAR will not extend to a Distribution on striking off, where the £25,000 limit mentioned above will instead apply.


Company/shareholder toolkits for ceasing trading

Cost effective tools to assist you through complex legislation:

Use the Virtual Tax Partner © TAAR tool to check whether your liquidation dividends are taxed as capital or income.

Use the Virtual Tax Partner © Toolkit to check whether your share disposal (if not affected by the TAAR) qualifies for Entrepreneurs' Relief.


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