Commentary

D6.710 Liquidation—corporation tax implications

Corporate tax
Corporate tax | Commentary

D6.710 Liquidation—corporation tax implications

Corporate tax | Commentary

Tax implications of insolvency

D6.710 Liquidation—corporation tax implications

Liquidation is essentially about selling off company assets in order to pay creditors and then closing the company. For a solvent company whose directors have decided to stop trading this can be done via a members voluntary liquidation. For an insolvent company, directors can wind up their company through a creditors voluntary liquidation or a compulsory liquidation.

From 1 December 2020, HMRC is a secondary preferential creditor in insolvency proceedings in relation to certain taxes1. Prior to this date, tax liabilities arising prior to administration ranked as unsecured debts with HMRC standing in the same position as any other creditor and not able to bring proceedings to enforce the debt while the company is in administration. See further A1.608.

The tax implications of a liquidation are wide-ranging. The main areas it affects can be split into the following:

  1.  

    •     accounting periods

  2.  

    •     computation of profits and terminal losses

  3.  

    •     applicable corporation tax rate

  4.  

    •     beneficial ownership of assets, and

  5.  

    •     VAT

Also, specific pre-liquidation transfers/transactions may be challenged by the liquidator in certain circumstances.

Accounting periods

The commencement of a liquidation gives rise to the termination of an accounting period and the commencement of a new accounting period of 12 months beginning with the first day of the liquidation process

The automatic termination of the company's accounting period may have adverse tax consequences for the company. See, for example, the facts in Magnavox Electronics Co Ltd1.

For this purpose a liquidation commences on the passing of a

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