Informal winding up

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

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

This document discusses some of the issues a company and its shareholders face when they wind up a company. It provides guidelines on tax considerations on winding up, distribution of assets, taxation of distributions to shareholders, and rules on distributions in anticipation of dissolution.

 

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.

Tax considerations on winding up

Before the cessation of the trade, the diminishing of the business has no tax effect unless done over a considerable period of time. In this instance it might be seen as a change in the nature or conduct of the trade. Accordingly, it is possible that losses brought forward may be lost see the Trading losses and anti-avoidance guidance note.

Accounts

It is typical for companies to draw up statutory accounts to the date that 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 General principles ― companies guidance note for more information.

Tax computation

Where trade ceases, a chargeable accounting period ends and the company will need to prepare a corporation tax computation. Losses may be used under the terminal loss relief

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