Companies are born when they are ‘incorporated’, they live, they go into ‘intensive care’ on liquidation or administration, and they ‘die’ on dissolution.
People are often surprised to hear that while it costs under £100 to incorporate a company, it costs several thousand pounds to close it down through a formal liquidation. This article is about the dissolution process, and how what is a relatively simple process can be used to bring about the end of non-trading companies with no or minimal assets and no or minimal debts, without the cost of going into liquidation.
So read on if:
- Your company has minimal or no assets
- Your company has minimal or no external debts
- Your company has under £25,000 of assets for distribution to shareholders
So let’s explore this …
Comparing striking or dissolution with liquidation and administration, many of the rules regarding insolvency are found in the Insolvency Act 1986 and Rules, whereas the rules for dissolution lie within the Companies Act 2006:
- Section 1003 gives the directors of a company the ability to strike off a company that has no debts.
- Section 1000 gives the Registrar of Companies the ability to strike off a company off if it fails to submit accounts or a document called a confirmation statement (the old ‘annual return’).
How does a Section 1003 director strike off work?
The process is…
- You deal with any assets and pay off any debts.
- If you have a number of directors, get some board minutes signed confirming your agreement to strike the company off. Minute the fact that as there are no assets and no debts, the strike off procedure is appropriate.
- Write to HMRC sending them a CT600 and accounts, together with an explanation that the company is in the process of being struck off.
- Deregister for VAT and PAYE. Use these links to do it online.
- Send form DS01 (with a cheque for £10 payable to the Registrar of Companies) to Companies House, Crown Way, Maindy, Cardiff, CF14 3UZ. Get it signed by all directors if you can. This can be done online.
- At the same time send a letter together with a copy of the DS01 to everyone you think might be a potential creditor or interested in the company’s strike off, in order to explain what’s happening – send it to former employees, suppliers, creditors, the pension fund. Keep a record of who you sent it to and when – best if you keep a copy of the covering letter.
- The Registrar of Companies will acknowledge receipt of the DS01 and place an advertisement in the London Gazette.
- If no one writes to HMRC to object, then two months later the Registrar will put another advert in the London Gazette to say that the company has been dissolved.
How are the shareholders affected?
Distributions to shareholders in a liquidation are taxed under the Capital Gains Tax rules. Distributions on a striking off are treated similarly, but only up to £25,000, by concession under ESC C16.
If you are looking to distribute over £25,000 on a striking off, income tax is charged on the whole of the distribution – so it’s often better to put the company through a solvent ‘members’ voluntary liquidation’ for distributions above this figure.
HMRC – can they be difficult?
Yes, on two bases…
Firstly, because you can’t talk to anyone there, no one there seems to take responsibility and they don’t respond quickly to any documentation they receive.
The Registrar of Companies will not strike off a company that owes any money to HMRC, that is if HMRC tell them on time. If any ‘late claims’ come to light, after dissolution, then HMRC can apply to have the company restored to the Register. Restoration after a Section 1000 strike off is a simple matter, all HMRC have to do is submit a form to the Registrar of Companies. Restoration after a Section 1003 strike off requires HMRC to apply to court.
In practice, it’s a good idea to get the forms in to cancel the various registrations with HMRC and CT600s early, then leave it a few months before submitting the DS01.
Secondly, there might be difficulties where a company has more than £25,000 in assets.
One option could be to distribute some of the profits by dividend leaving less than £25,000 in the company and then distribute what is left using ESC C16, as a capital distribution. However, there is a risk that HMRC look at the distributions as a whole and treat them all as an income tax distribution.
This is because a few years ago HMRC introduced some rules – the so called Targeted Anti-Abuse Rules – to prevent people converting dividends into capital on distributions made in windings-up of companies. The rules apply where:
- The person carries on trading in the same or similar trade within 2 years; and
- A purpose of the winding up is to reduce income tax.
Here’s a link to some guidance given to the Chartered Institute of taxation by HMRC.
A straight dissolution can be a great way to either ‘kill off’ a company that’s no longer required or get a relatively small amount of money / assets out of a company to its shareholders, and so should be considered as a cheap but highly effective alternative to liquidation where the circumstances are right. But as with any ‘liquidation’ it’s never a bad idea to take an insolvency practitioner’s advice.