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Tax hit for companies going out of business.

Posted by Sam Talby on 3/5/2012

Where a company chooses to distribute its assets to its shareholders and apply for striking off the company register, rather than appoint a liquidator for a formal winding up, HM Revenue & Customs have been prepared to apply the same tax treatment provided certain assurances are given.

The practice was under extra-statutory concession C16, and the assurances had to include that the company does not intend to trade or carry on business in the future, intends to collect its debts, pay off its creditors and distribute any balance of assets to its shareholders, and intends to seek or accept striking off and dissolution. HMRC would then apply capital treatment to the distributions, which would mean a rate of tax of 10% where Entrepreneurs Relief applied.

However, the HMRC concessions are being replaced by formal legislation, and the new rules will only apply capital treatment where the total distributions in anticipation of striking off, do not exceed £25,000.

Although the new treatment applies to distributions on or after 1 March 2012, HMRC have said that where distributions straddle this date, those paid out before are still counted in arriving at the £25,000 limit.

The result in these cases would be an income tax charge on the amounts distributed (effectively at 25% for higher rate tax payers, or 36.1% for additional rate taxpayers). The only route to secure the capital treatment rate would be a formal winding up, by way of a members voluntary liquidation.

For more information, please contact you local Business Recovery and Insolvency specialist.

All information correct at time of posting.

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