Restructuring tax - FAQs
Our Restructuring Tax Team has answered some common and frequently asked questions to provide an insight into the various tax implications that may be considered when a company enters into a formal insolvency procedure.
Are Administration and Liquidation fees allowable for corporation tax?
This is dependent on the nature of the fees paid.
- Incidental costs of disposal
- As noted in the HMRC manuals, it may be possible to deduct any expenditure incurred by an Administrator / Liquidator as an allowable incidental cost of disposal provided that it is wholly and exclusively incurred in disposing of the company’s assets.
- In relation to amounts actually paid to the Administrator/ Liquidator, providing that it can be demonstrated that such fees (or a proportion of them) have been wholly and exclusively incurred in disposing of the company’s asset, they too would be an allowable incidental cost of disposal.
- Other allowable expenditure
- Administration / Liquidation expenses are allowable in computing taxable profits where they would be deductible under the normal tax principles.
- It would then be necessary to establish whether or not any expenses would qualify under the loan relationship rules or as a management expense for a company that has ceased to trade as part of the insolvency process.
Do you pay corporation tax when in Liquidation?
A company resident in the UK for tax purposes continues to be subject to corporation tax on any profits arising during the liquidation process.
Under rule 3.51, corporation tax ranks as a payable expense in the Administration as follows:
- Expenses properly incurred by the Administrator;
- Any necessary disbursement by the Administrator in the course of the administration – excluding any corporation tax payments on chargeable gains. Whist not specifically expressed, it is generally accepted to include corporation tax on income etc. as part of this category, however corporation tax on chargeable gains is specifically excluded;
- The Administration’s remuneration and unpaid pre-administration costs approved;
- The amount of CT on chargeable gains accruing on the realisation of any asset of the company.
Under rule 4.218, corporation tax ranks as a payable expense in the Liquidation as follows:
- Any necessary disbursement by the liquidator in the course of fulfilling his duties – excluding any payment of tax on chargeable gains. As was the case of Administrations, whist not specifically expressed, it is generally accepted to include corporation tax on income etc. as part of this category, however corporation tax on chargeable gains is specifically excluded;
- The remuneration of the liquidator;
- The amount of CT on chargeable gains accruing on the realisation of assets of the Company;
- The balance of any remuneration due to the liquidator;
- Any other expenses properly chargeable by the liquidator in carrying out his functions in the liquidation.
How does insolvency work on corporation taxes?
Once a company enters into insolvency, this essentially triggers the start of a new accounting period for tax purposes; however:
- For Administrations, the existing accounting period ends the day before a Company enters Administration.
- For Liquidations, an accounting period starts when the winding up of the Company commences.
Corporation tax liabilities that arise pre-insolvency will not be an expense of the liquidation / administration but instead form a part of HMRC’s unsecured claim.
Tax liabilities that arise post-insolvency will be an expense of the Administration / Liquidation. Details of how the expenses are ranked are included within question 2 above.
How do I close a limited company without paying corporation tax?
Whilst it may be possible to dissolve a company without incurring a corporation tax charge, this will be dependent upon the specific facts and circumstances of the case. We would therefore recommend that tax advice is sought prior to closing down a Company to ensure that this is carried out in a tax-efficient manner.
What is the impact of HMRC now having preferential status?
As discussed in HMRC’s publication dated 30 November 2020, as of 1 December 2020, HMRC has been given preferential status.
This preferential status is in relation to certain but not all taxes. Currently, the taxes which have preferential status are PAYE, VAT, Employee NIC, CIS, and student loan deductions i.e. the taxes collected by a Company on behalf of HMRC. On this basis, corporation tax and any other outstanding taxes would still be considered as unsecured creditor balances.
The preferential status means that the payment of outstanding PAYE and VAT balances now ranks ahead of the payment of a floating charge and unsecured creditor balances in an Administration / Liquidation, thereby placing an emphasis on ensuring that HMRC’s preferential claim is correct and not overstated.
We would therefore recommend that work is undertaken to verify the outstanding amounts and also investigate the possibility of reducing HMRC’s claims.
Do post-appointment Liquidation returns need to be filed?
As noted in s108 TMA 1980, upon appointment the liquidator becomes the officer of the company and is therefore obliged to fulfil the company’s formal filing obligation such as filing corporation tax returns.
Whilst HMRC does look to be modifying their systems and looking to reduce the administrative filing burden on Liquidators of insolvent companies unless there is no taxable income at all, corporation tax returns should continue to be filed.
Please find a link to HMRC’s new publication on this matter here.
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