Enter Your E-mail

Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP, General Editor of TaxationWeb, highlights recent guidance from HMRC on its policy and practice of collecting company tax debts.Practitioners may be asked to advise on the winding up of companies from time to time. A company may be dissolved either by formal winding up under the Insolvency Act 1986, or if solvent by a members’ voluntary liquidation. An alternative method of dissolving the family company is to apply to Companies House for striking off under Companies Act 1985, s 652A. However, companies may also be the subject of a winding up petition in certain circumstances, including if it has tax debts which it is unwilling or unable to pay.

HM Revenue & Customs (HMRC) recently published a series of leaflets to be sent out by their Debt Management Units with covering letters outlining the procedure for recovering debts. This series includes leaflet EF6 ‘Winding-up – what the company must do’ (separate leaflets are available for companies in Scotland and Northern Ireland). The leaflet is issued to companies with tax arrears. If the company cannot pay those arrears immediately, its officers (or agents) are expected to contact HMRC within seven days with proposals to settle its debts. The company’s officers are also expected to explore ways for the company to raise funds to settle its tax debts. Any proposals submitted to HMRC for payment arrangements should be supported by financial information, such as accounts and cashflows, together with a statement of assets and liabilities.

Insolvent companies – formal winding up

Company director shareholders who receive a letter from HMRC with leaflet EF6 should not take the matter lightly. HMRC indicate that they will file a winding-up petition in the High Court if there is a late response (or none at all). The petition is advertised in the London Gazette, which may result in the company’s bank account being frozen. Other creditors may join the proceedings. Court hearings take place in London or Bristol.

If the company is wound up, the Court appoints a liquidator. All trading by the company will then cease. The directors must hand over its books and records to the liquidator. After the company’s assets are realised and creditors repaid, the company is dissolved and struck off the company register, with any surplus funds being paid to the shareholders.

Leaflet EF6 warns that HMRC may contact the Department of Trade and Industry if the company has deliberately withheld tax payments or failed to operate a PAYE scheme, or has wrongfully traded, re-used the company name or made transactions at undervalue. This could result in the directors being disqualified from running a company for between three and fifteen years. Trading with the same or a similar company name without the Court’s permission can also result in personal liability for any debts incurred.

A copy of Leaflet EF6 can be downloaded from the HMRC website (http://www.hmrc.gov.uk/leaflets/ef6-factsheet.pdf), together with its counterpart leaflets for companies in Scotland and Northern Ireland.

Solvent companies - Informal winding up

By contrast, if the company is solvent, the business owners may undertake an informal winding up, and ask HMRC to apply Extra Statutory Concession C16. This concession allows a company’s dissolution under Companies Act 1985, sections 652 and 652A (or any comparative provisions) to be treated as a formal winding up for tax purposes. The company secretary and its shareholders must give HMRC certain assurances:

• The company – that it does not intend trading or carrying on a business in future, intends collecting its debts, paying off creditors and distributing any balance of its assets to its shareholders, and intends to seek or accept striking off and dissolution; and

• the company and its shareholders – i.e. that company tax returns, accounts etc will be submitted to determine any tax liabilities, any corporation tax liability on income or chargeable gains will be paid, and the shareholders will pay any capital gains tax liability (or corporation tax if a company shareholder) in respect of any amounts distributed to them as if the distributions had been made during a winding up.

It should be remembered that Concession 16, like any other Concession, can be refused or withdrawn by HMRC if considered appropriate. It is therefore important that the winding up takes place in an orderly fashion, and in particular that any tax liabilities arising are paid promptly.

March 2006

Mark McLaughlin CTA (Fellow) ATT TEP

The above article was first published in Busy Practitioner, a monthly Newsletter by Tottel Publishing. For further information and to order, click here