Formal Winding Up

Today I’m writing about the procedure involved as well as the tax implications, when a company is struck off from the Companies House register.

Formal Winding Up: The Law

When you wish to close a company you use the striking off process is used to bring its life to an end. In an ideal world, with agreement between the directors and shareholders, no debts and for the sake of a few petty formalities, Companies House does the administration for you all for the paltry sum of £10.

The striking off regulations can be found under Part 31 of the Companies Act 2006 – “Dissolution and restoration to the register” which permits the striking off of a company in two specific instances:

1. When the majority of directors agree to the closure and critically, that the company is solvent: should debts remain then the company must use the winding-up route.
2. Companies House the right to strike off if there is reason to believe that it is no longer in business, as long as there is some form of proof; such as a failure to submit accounts and/or non-response to letters sent to the company’s registered office.

But be advised, a company cannot apply to be struck off if it is in the process of being wound up or is subject to a CVA (ie a compromise arrangement between a company and its creditors).

Formal Winding Up: Director’s strike off

The Directors must:

• Convene a board meeting and arrange for the board to pass an ordinary resolution to apply for the company to be ‘struck off’. Minute that the company has paid all its outstanding debts.
• If necessary, shareholders need to approve a special resolution recording any reduction in share capital; all directors to sign a solvency statement. Send a copy of the resolution within 15 days of being passed to Companies House plus solvency statement, statement of capital showing the changes and a director’s statement confirming the validity of the statements.
• Advise HMRC of the strike off by submitting a CT600 and Annual Accounts’ together with a letter confirming the situation and undertakings of both shareholders and directors.
• Deregister for VAT (and PAYE if relevant).
• Submit form DS01 (plus £10 filing fee) to Companies House signed by all directors. This can be done online and Final Accounts are not required.
• Within seven days of submission send a copy of the DS01 form to all interested parties (eg employees, creditors, manager of company pension fund etc).
• On receipt of DS01 Companies House will register the information and place on public record, send an acknowledgement to the address shown on the form, publish a notice in The Gazette inviting objections as to why the company should not be struck off and send a notification to the company at its registered office address to enable it to object if the application is bogus.
• If no objections are filed within two months of publication a further notice is published in The Gazette confirming that the company has been dissolved.

Assets remaining after a strike off automatically pass to the Crown under the doctrine of “Bona Vacantia” (property without a legal owner). This can be avoided by ensuring assets or property are transferred or dealt with before a company is dissolved; the alternative is a formal winding up and that is expensive.

Formal Winding Up: HMRC’s position

Companies House will not strike off a company that has outstanding debts or obligations to HMRC. As from April 2020, HMRC will become a secondary preferential creditor for unpaid VAT, PAYE and income tax on any winding up. However, striking off is not winding up, which must be conducted by a liquidator. So the company must be restored to the register if HMRC wishes to make a claim for unpaid taxes at a later date.

Clearly, whether HMRC will pursue any tax owing will depend upon the amount, the likelihood of being able to prove that the alleged debt is payable, the likelihood of being paid and the ease of company restoration. Restoration of a company that has been subject to a compulsory strike-off is by a paper form, restoration of a voluntary strike off requires court action.

Formal Winding Up: Shareholders’ tax position

Payments to shareholders under a formal winding up are taxed as capital. Assets distributed on a striking off are deemed as capital chargeable to CGT rather than income to a maximum amount of £25,000, with any amount in excess of this is charged to income tax payable on the whole amount.

Formal Winding Up: Other points to consider

1. Where a company has in excess of £25,000 in assets it might be tempting to distribute profits by dividend before striking off leaving less than £25,000 in the company and then claim for the remainder as capital. However, such dividends could be considered by HMRC not be a distribution at all and if this is the case, then all payments would be subject to income tax with the capital treatment for the remaining £25,000 being lost.
2. The Targeted Anti-Abuse Rules introduced to combat ‘phoenixing’ (the practice of closing one company and starting a new one immediately) only applies to distributions made on winding up. It does not apply on striking off.
3. Under a striking off procedure, Companies House will not normally pursue any outstanding late filing penalties unless the company is restored to the register at a later stage and if you need resolution and minutes templates, these can be found at: https://simply-docs.co.uk/Home

If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.