Tax

UK tax issues

Taxation of companies subject to insolvency procedures

There are relatively few specific rules governing the taxation of companies that are subject to insolvency procedures. The basis approach to the taxation of companies in an insolvency process is that the normal tax rules applicable to the particular situation that has arisen should be applied.

One of the consequences of this is that different insolvency procedures often give rise to different tax treatments and effects, and so the choice of the procedure adopted is not strictly tax-neutral.

The tax issues that can arise in relation to a company in financial difficulties are many, varied and frequently complex.

One of the main direct effects of entry into one of the formal insolvency procedures (ie liquidation (of either kind) and administration) is on the corporation tax accounting periods of the company concerned.

One of the most important consequences of liquidation and administration and their impact on a company’s accounting periods is on the company’s ability to use its tax losses, particularly the ability to set their trading losses against any chargeable gains that may be realised during the insolvency

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Insolvency–fraudulent trading and dishonest assistance (Bilta and others v Tradition Financial Services)

Restructuring & Insolvency analysis: The Supreme Court held that liability for fraudulent trading under section 213 of the Insolvency Act 1986 (IA 1986) is not limited to directors or other persons exercising management or control over the company in question. Rather, liability can attach (as the natural meaning of section 213 admits) to any person who is knowingly party to the carrying on of the company's business in a fraudulent manner. The Supreme Court further restated that an isolated act of fraud in an otherwise legitimate business would not amount to fraudulent trading. The Supreme Court was also asked to determine whether claims in dishonest assistance, parasitic on the directors' breaches of their fiduciary duties, were statute barred under the Limitation Act 1980 (LA 1980). The claims were issued more than six years from the dates of those breaches. The claimants sought to postpone the accrual of the limitation period under the LA 1980, s 32, ie until the time the claimants either discovered the fraud or could with reasonable diligence have discovered it. On the assumed facts, and notwithstanding the intermediate dissolution and restoration of the companies, the claimants could not rely on LA 1980, s 32 and were consequently stature barred. Written by Sam Fenwick, partner, Suleika Horrocks, trainee solicitor, and Isabelle Burnett, solicitor apprentice at Wedlake Bell LLP.

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