Informal winding up

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Informal winding up
  • Tax considerations on winding up
  • Transactions in securities
  • Company law
  • Taxation of distributions to shareholders
  • Distributions in anticipation of dissolution
  • Loans to participators

A formal liquidation can be seen as an unnecessary expense when a company ceases business. This is especially true for small companies where the owners will not want to incur several thousand pounds of fees simply to realise the profits of their business.

The Companies Act 2006 does offer an alternative to the formal liquidation process. This is an ‘informal’ liquidation, or ‘winding up’, and is done by the company applying to Companies House to strike the company off the register.

This guidance note discusses some of the issues a company and its shareholders face when they wind up a company using the procedures under CA 2006, s 1003 (subscription sensitive).

Tax considerations on winding up
Impact of the diminishing trade

Before the cessation of the trade, the diminishing activity of the business has no tax effect unless it takes place over a considerable period of time. In this instance HMRC may take the view that there has been a change in the nature or conduct of the trade. Accordingly, it is possible that trading losses brought forward may be lost. See the Trading losses and anti-avoidance guidance note for more information.

Financial statements

It is typical for companies to draw up statutory financial statements to the date that the trade ceases. In drawing up the accounts, provisions will be made for future debts arising as a result of the trade. These provisions are typically allowed under general principles, though care needs to be taken with expenses which have specific rules, such as bonuses or bad debts. For example, a general bad debt provision will still not be allowable due to CTA 2009, s 55.

CTA 2009, s 46

See the Trading income ― general principles guidance note for more information.

Corporation tax computations

When

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