Struggling businesses ― closing the company down

Produced by Tolley

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

  • Struggling businesses ― closing the company down
  • Tax efficient winding-up / liquidation
  • Direct tax implications
  • Indirect tax implications
  • Restructuring to protect business assets
  • Disposal of loss-making part of the business
  • Terminal loss relief
  • VAT implications of restructures
  • Negligible value claims and loss relief for shares

Struggling businesses ― closing the company down

In these current very difficult times, some businesses will unfortunately struggle and ultimately fail. This guidance note details some of the key issues that may need to be considered to ensure the most tax efficient and commercially sensible solution is achieved.

Tax efficient winding-up / liquidation

Company administration aims to help the company repay debts in order to escape insolvency (if possible), whereas liquidation / winding-up is the process of selling all assets before dissolving the company completely. Although the decision as to whether to enter administration and possibly ultimately wind-up the business is primarily a commercial one, there are various tax implications (direct and indirect) that should be discussed with your client, as detailed below.

Direct tax implications

The primary direct tax consequences that need to be considered when a client is entering administration, and possibly ultimately winding-up, centre primarily around compliance issues, group relations and planning on an ultimate winding-up. Issues that should be discussed with your client include:

  1. the effect on accounting periods ― the appointment of an administrator causes a new accounting period to begin, and the old accounting period ends the day before the appointment and a new one begins on the day of the appointment. The appointment of a liquidator has the same effect

  2. the deductibility of expenses during a liquidation, both trading expenses and any expenses of winding-up

  3. the utilisation of trading losses on the cessation of trading, as there are special rules that increase the window into which losses can be carried back

  4. the impact on group relations, particularly in relation to group relief and capital gains and also the availability of the substantial shareholdings exemption

If the shareholders chose not to continue the business, they will need to ensure that the company is closed down via the most tax efficient method in order to minimise tax and extract full value from the company. If the company is a trading

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