Understanding corporation tax implications when liquidating your company
When a company becomes insolvent, there are many issues to be dealt with, and tax is likely low down on the list of priorities. However, there can be many tax implications when it comes to liquidations, and it is very important to get this right. For insolvent companies, the liquidator has a responsibility to make sure the tax is correct to ensure funds are returned to creditors. For solvent liquidations, where an owner is perhaps conducting a member’s voluntary liquidation to extract profits from the company at lower Capital Gains tax rates following the closing of the trade, getting the tax position is important to make sure the correct funds are returned to the owners of the company.
As well as the tax implications of liquidation, there are also specific pre-liquidation transactions which can be challenged by a liquidator in certain circumstances, so it is important to get these matters are done right.
At Gravita, we specialise in advising on the tax positions in liquidations helping owners and liquidators/administrators get the tax right and help with tax planning. Below are some of the areas that we see when helping on liquidations but there are many more and it certainly pays to have a tax specialist in your corner that has vast experiences working on liquidations.
1.General corporation tax position on liquidation
Companies in liquidation are still required to submit company tax returns to HMRC, there is no escaping this. Large penalties can apply if filed late and therefore it is important to plan early to abide by filing rules.
When a liquidation commences, the company’s accounting period ceases, and a new one begins for corporation tax purposes. The automatic cessation of an accounting period can have adverse tax implications which are mentioned further below (under beneficial ownership of assets).
Profit or losses arising during the liquidation period are calculated in the normal way and corporation tax payable on any profits. The commencement of liquidation does not itself mean the trade ceases, as a result trading losses will continue to be offset in the normal manner. Where a trade does cease, it is possible to consider a carry back loss claim including terminal loss relief claims where losses could be carried back 3 years to obtain corporation tax refunds for the company, a potential cash boast on liquidation if claimed.
There is also the possibility for losses to become lost when a trade ceases. Take the example the trade ceases but the company owns property it sells later after the trade ceases. Even though company loss rules are particularly generous now with the new rules post 2017, to carry forward trade losses the trade must continue in the later period, therefore careful timing and planning is usually required before liquidators sell assets to make sure there is no unwanted corporation tax arising.
2. Deductibility of liquidator’s expenses
This is a common question that arises in most liquidations as liquidator’s costs can be high, and it can save a lot of corporation tax if they can be deducted from income received during the liquidation period. There are no special rules that enable liquidator’s fees to be deducted but, there are a number of ways to argue deductibility such as:
- If incurred to dispose of assets, possibly allowable when calculating the chargeable gain.
- If the liquidator carries on the trade, costs may possibly be allowable under general principles, where wholly and exclusively for the purposes of the trade, noting work on the liquidation itself is generally not considered allowable as a tax deduction.
- Work on the company debt position under corporation tax debt rules.
- Under post cessation expenses rules where incurred after the trade has ceased.
Analysing liquidator’s costs can save a lot of corporation tax and avoid disputes with HMRC.
3. Beneficial ownership of assets
When entering liquidation, a company loses the beneficial ownership its assets, even though the legal ownership remains with the company. This has some unwanted tax consequences as follows:
- If the company is part of a group, the group relationship ceases for a lot of taxes. This can result in adverse consequences for a range of different taxes, including corporation tax, SDLT group relief and certain tax on assets moving around the group pre liquidation.
- It may also invalidate certain corporation tax elections previously entered into which can have large adverse tax consequences.
These risks can sometimes be mitigated by conducting pre-liquidation reorganisations, for example inserting a new holding company to preserve group relief between different entities. There are some tax reliefs that remain in liquidation, but care needs to be taken and advice requested to make sure the company’s tax position is protected.
4. Don’t forget VAT
Generally, entering into liquidation means a VAT period ends and new dates for VAT returns apply. Care needs to be taken to avoid late returns under these new periods. Should the company cease to make taxable supplies (i.e. cease to trade), VAT de-registration rules can apply, however care needs to be taken when selling company assets that VAT is considered and taken into account. Some commercial property may also be opted to tax for VAT purposes and VAT must be considered and planned for so there is no VAT leakage. VAT can be a minefield at the best of times, and it is extremely important good VAT planning is undertaken, something Gravita has vast experience of.
Get expert tax advice for your liquidation
Need expert guidance on your liquidation tax matters? Contact Gravita’s experienced corporate tax specialists today for professional advice on corporation tax, VAT, and pre-liquidation planning. Our team has extensive experience helping companies and liquidators resolve complex tax issues during liquidation proceedings. Get in touch now to ensure your tax position is correct and compliant.
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