COVID-19 – Winding Up Businesses
In our recent blog posts, we have dealt with how businesses can introduce COVID-19 supportive procedures – such as the Government’s business schemes, designed to support business owners in these difficult times.
We now want to explain the procedures involved in ‘winding-up’ a company, for those who are unable to recover following the disruptions caused by COVID-19.
Sole Trader and Partnership Closure
If a business owner’s trading vehicle is non-corporate (i.e. a sole trader or a partnership) then closure is relatively straightforward and can be managed by a business owner, with the support of their accountant. The completion of a formal liquidation procedure, involving the appointment of a liquidator, is not necessary.
Limited Liability Closure
Many SME owners, trading via a limited liability company, have reluctantly had to conclude that COVID-19 is leading their businesses to insolvency, and the only way out is to stop trading.
The timing of the cessation of trade is important, as there will be business closure costs such as staff redundancies, leasehold premises costs, and final tax bills. It is recommended that company records (such as directors’ minutes’) record the start of trade cessation. Final accounts to the date need to be completed and filed to HMRC, along with the final Corporation Tax Return.
All trade debts need to be paid, including paying a company’s final Corporation Tax and payroll taxes. The company’s payroll needs to be closed and staff issued with P45 forms.
Calculating Closure Costs
It will be necessary to calculate if paying closure costs will mean that the company remains solvent. This would allow the owner or manager to control the liquidation of the company under a member’s voluntary winding-up.
If the company is insolvent, before or after closure costs, then the winding-up is required to be controlled by the creditors’ appointing a Liquidator; something to be avoided if possible.
If the owner or manager company ceasing to trade is solvent after settling its closure costs, then the way forward will depend on the size of the company’s net reserves.
If the net reserves are £25,000 or below then the members voluntary winding-up process can be achieved through the relatively inexpensive formal dissolution process. This process is inexpensive as a professional liquidator does not need to be appointed to manage the winding-up process.
Distributing Net Reserves
The informal dissolution process involves notifying Companies House that you intend to have the company dissolved. This is more commonly known as the ‘striking-off procedure’.
The distribution of the £25,000 or below net reserves can then be paid to the shareholders as capital distributions in line with the number of shares owned. A directors’ minute confirming this capital distribution is advisable. The capital distribution is taxable on the shareholders under the Capital Gains Tax (CGT) rules which will allow the capital distribution to be covered by the shareholder’s ‘unused’ annual CGT exemption (currently £12,300).
If after utilising the CGT annual exemption there remains a capital distribution chargeable to CGT, then the CGT rate will at the lower 10% – provided the company is a trading company under the Business Asset Disposal Relief (BADR) rules (which provide a 10% CGT rate for up to £1m lifetime BADR capital gains).
The other BADR rules also need to apply, such as:
- For the 2 years before the company ceased to trade, the recipient shareholder was an employee or director of the company and also that the shareholder owned at least 5% of the company’s ordinary share capital, voting rights and economic rights.
- The owner or manager shareholders cannot start a similar trade in a new company or another business format during the 2 years following the date of the capital distribution as made under the informal winding-up process – more commonly known as the ‘Anti-Phoenix rules’.
If at the date of the cessation of trade the company’s reserves are above £25,000 the mentioned BADR rules and the Anti-Phoenix rules will still apply, but the informal winding up dissolution process should be avoided until the numbers have been crunched. This will uncover if the total income tax bill on the income distributions under the informal dissolution winding-up is higher than the Liquidator’s costs under a formal winding-up.
The reason being that the appointment of a Liquidator will ensure that the distributions of the net reserves to the shareholders will all be treated as capital distributions and therefore liable to CGT at the lower CGT rates – possibly as low as the BADR rate of just 10% – rather than taxed as income distributions, which are liable to Income Tax, at the dividend income rates currently ranging from 7.5% (basic rate taxpayers) through 32.5% (higher rate taxpayers) to a maximum of 38.1% for additional rate taxpayers).
If the company’s net reserves are above £25,000 then consider reducing the net reserves to £25,000 or below. This will enable an informal winding-up – by paying an income dividend to the shareholders and/or redundancy pay to the directors (up to £30,000 tax-free per director).
The latter redundancy payment to a director can be provided as long as the director has been working full time for the company under an employment contract.
The above reduction of net reserves should only be considered once the Liquidator’s costs are known so that the Income Tax liability calculation can then be completed on the proposed income dividends.
How We Can Help
At HaesCooper, we can help you complete the necessary steps to deciding the best way to wind up your company. This can ensure the winding-up process is completed quickly and in a way that maximises your company’s after-tax reserves for your benefit.
We have developed a good professional working relationship with an experienced registered Insolvency Practitioner for completing those formal members voluntary winding-up requirements. Contact us to learn more.
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