When a trading company in the UK reaches the end of its life, whether due to strategic decisions or financial necessity, the process of legally dissolving it can be complex. This blog post outlines the key steps and considerations involved in striking off a company, covering both solvent and insolvent scenarios. We will also delve into the tax implications and alternatives if striking off isn't feasible due to insolvency.
Steps to Dissolve a Solvent Company
Ceasing Operations and Notifying Interested Parties: The company should cease its business activities. Inform all stakeholders, including employees, customers, suppliers, and creditors, of your intention to dissolve.
Settling Debts: Ensure all company debts are paid. If debts remain unpaid, striking off may not proceed as creditors can object to the dissolution.
Dealing with Assets: Liquidate all assets and distribute the proceeds amongst shareholders according to their shareholdings after settling debts.
Filing Final Accounts and Tax Returns: Submit final statutory accounts and a Company Tax Return to HMRC. Pay any outstanding corporate taxes.
Applying for Striking Off: Once all debts are settled, and final accounts submitted, apply to Companies House using Form DS01. A £10 fee is applicable.
Notification of Striking Off Application: Companies House requires you to inform stakeholders within seven days of the application. This includes shareholders, creditors, employees, managers of employee pension funds, and directors who didn’t sign the application form.
Dissolution: If there are no objections, Companies House will strike off the company, typically two months after the publication of the notice in the Gazette.
How do you qualify for informal strike off?
To strike off, a company must meet the following HMRC conditions:
Not traded or sold any stock in the last three months
Not changed their name in the last three months
They are not threatened with liquidation
Have no agreements with creditors, such as a Company Voluntary Arrangement (CVA), for example
HMRC and all other liabilities must be paid
What can stop the company being struck off?
Before a company is struck off Companies House will check with HMRC.
If HMRC believes that there is or might be some tax due from the company they will object to the dissolution and Companies House will reject the application.
So, before sending in a form DS01 it may be as well to obtain advance clearance from HMRC that no tax is or might be due. If the company has never traded or been dormant for several years then HMRC are most unlikely to challenge an application for striking off and you can safely proceed without seeking prior clearance.
The advantages of informal strike off are:
It’s relatively quick and simple, there is no formal process
It’s inexpensive
It’s tax efficient if your remaining profits are less than £25,000. If retained profits are higher than £25,000, dividends can be issued to reduce the retained profits before company stops trading
Any retained profits are taxed as Capital Gains if the profits are less than £25,000.
With Capital Gains, you have an additional allowance called the “Annual Exemption”, where Capital Gains up to this point are taxed at 0%.
It’s key that before you decide on your closing method, you speak to an accountant about issuing dividends that are tax-efficient. Leaving this until your accounts are being completed might mean it’s too late to issue any more dividends.
Tax Consequences - Company
Assets other than Plant and Machinery: The company might have to account for Capital Gains or losses (Capital Gains Tax (CGT) if the assets increased or decreased in value (Market Value) when transferring it to Shareholder.
Plant and Machinery: There will be capital allowance balancing adjustment (balancing charge or balancing allowance) depending on if the sale proceeds (MV, capped to original cost) above or below the tax written down value.
Corporate Tax: Up to the date of dissolution, the company is liable for corporate taxes on any income or gains.
VAT: Ensure all VAT returns are up to date, and deregister from VAT if applicable.
Employee-Related Tax Issues: Finalize PAYE and National Insurance contributions.
Tax Consequences - Shareholders
Income Tax: if the value of the assets are above £25,ooo it will be treated as income distribution and individual pays income tax on this subject to dividend income nil rate band.
Capital Gains Tax(CGT): If the value if below £25,000 it will be treated as distribution of capital to the shareholder subject to Annual exemption and CGT Reliefs.
Handling an Insolvent Company
Striking off is generally not an option for insolvent companies. Insolvency implies that the company cannot pay its debts as they fall due. In such cases, alternative methods such as liquidation through a creditors' voluntary liquidation (CVL) or compulsory liquidation might be necessary.
Creditors' Voluntary Liquidation (CVL): This is initiated by the directors when the company is insolvent. An insolvency practitioner is appointed to liquidate the company's assets and distribute proceeds to creditors.
Compulsory Liquidation: Triggered by a court order, usually after a creditor’s petition. This also involves an insolvency practitioner liquidating assets.
Who must I tell about the proposal to strike off the company?
When proposing to strike off a company in the UK, you must inform several key parties. The Companies Act 2006 specifically requires that certain individuals and organizations be notified within seven days of submitting the application for dissolution to Companies House. Here are the parties you need to inform about the proposal to strike off:
Shareholders: All shareholders should be informed as they have a vested interest in the dissolution of the company.
Creditors: This includes all current creditors, banks, and lenders. It's crucial to inform them as they have the right to object to the striking off if they believe the company owes them money.
Employees: All current employees must be notified, as the dissolution will affect their employment status.
Managers of any employee pension funds: If the company has any pension schemes, the managers of these funds should be notified about the company's impending dissolution.
Directors who have not signed the DS01 form: All directors should be aware of and agree on the decision to apply for striking off. If a director did not sign the form, they must be informed separately.
HM Revenue and Customs (HMRC): It's advisable to notify HMRC, especially if there are outstanding or soon-to-be-due tax liabilities, including corporation tax, VAT, and PAYE.
Any other parties with an interest in the company's affairs: This might include trade unions or any other relevant parties who might be affected by the company’s dissolution.
Failing to notify any of these parties can lead to complications, including possible fines or the striking off action being suspended.
Checklist Before Requesting Strike Off
Cease Trading
Ensure the company has ceased trading or otherwise discontinued business activities for at least three months.
Notify All Relevant Parties
Inform all affected parties of your intention to apply for strike off, including shareholders, creditors, employees, pension managers, and directors who didn’t sign the DS01 form.
Resolve All Debts
Pay off all company debts, including loans, credit accounts, and trade creditors.
Settle Legal Disputes
Resolve any ongoing legal disputes or claims against the company.
Deal with Company Assets
Dispose of any remaining company assets and ensure assets are distributed among shareholders after all debts are paid. Any assets not distributed are effectively abandoned, bona vacantia, to the Crown as part of voluntary strike off.
File Final Accounts and Tax Returns
Prepare and file final statutory accounts up to the date the company ceased to trade.
Submit a final Company Tax Return to HMRC and pay any outstanding tax liabilities, including corporation tax, VAT, and PAYE.
Deregister for VAT and PAYE
If registered, deregister the company for VAT and PAYE with HMRC.
Close Bank Accounts
Close any company bank accounts and other financial products.
Employee Matters
Ensure all employee-related issues are settled, including final wages, pension contributions, and issuing P45s.
Keep Records
Retain company records as required by law, generally for a minimum of seven years.
Apply for Strike Off
Complete and submit Form DS01 to Companies House with the required fee.
Inform Companies House
Notify Companies House within seven days of sending the strike-off application to the relevant parties.
Additional Considerations
Check Eligibility: Verify that the company is eligible for striking off. For example, the company must not have changed its name, traded, or disposed of property or rights within the last three months before applying for strike off.
Objections: Be prepared to handle any objections from interested parties, which can delay or cancel the strike off process.
Comments