Ceasing trading index: Freeview

How a company can cease trading? What options are available when trade has ceased and the owner wants to retire?

This is a freeview 'At a glance' guide to ceasing trading.

Subscribers Click here for your detailed version of this guide.

At a glance

When a company ceases trading it can:

Voluntarily apply to be struck off the companies register.
Be wound up by a liquidator under a compulsory liquidation or members' voluntary liquidation.
Continue in business as a non-trading or investment company.
Continue in existence as a dormant company.

The route taken depends on the facts and circumstances of the case.

See A sale of the company or its shares? Start here

Striking off

Striking off is the process in which a solvent company is dissolved and struck off the Companies Register. It is often known as 'dissolution'.

Striking off is an alternative procedure to a formal liquidation.

Voluntary striking off:

The company must be solvent and if the company retains any assets including share capital at the point of striking off these will become Bona Vacantia and the property of the Crown when it is struck off.
A Capital Reduction procedure with a Statement of solvency may be recommended initially to repay share capital and non-distributable capital reserves to shareholders.

See Striking off a company

Liquidation

Liquidation is a process by which a company is wound up by a licenced insolvency practitioner under the Insolvency Act 1986.
Liquidation by compulsory order of the creditors is often unavoidable when a company becomes Insolvent.
When winding up a company consideration will need to be given each time a distribution is made as to whether the distribution is:
- Caught by the Transactions in Securities (TiS) rules and subject to Income Tax.
- Caught by the Targeted Anti-Avoidance Rule (TAAR) that applies to phoenixing and results in the distribution being subject to Income Tax.
- If not caught by the above, whether the capital distribution meets the conditions to qualify for Business Asset Disposal Relief or Investors' Relief.
If a company is in insolvent liquidation, from April 2020:
- HMRC will be a secondary preferential creditor for certain tax debts of the business, including VAT, PAYE (including student loan repayments), employee NICs, and Construction Industry Scheme (CIS) Deductions.
- HMRC will have powers to make directors and other responsible persons jointly and severally liable in cases of tax avoidance or evasion through insolvency.

Continuing as a non-trading or investment business

Once trade has ceased the company may continue in business by investing its income in other assets, e.g. property or investments, or operating as a Family Investment Company.
Shareholders will want to consider their position, as once the company's activities change, the qualifying conditions for the following Capital Gains Tax (CGT) and Inheritance Tax (IHT) reliefs may also cease to apply
- CGT Business Asset Disposal Relief (BADR) on a disposal of shares.
- CGT Hold-over reliefs on a lifetime gift or transfer of shares.
- IHT Business Property Relief on death.
If the company becomes a Close Investment Holding Company, it will, from 2023, be affected by a Higher rate of Corporation Tax as well as being subject to specific rules affecting CIHCs.

Remaining dormant

A company may be left Dormant with or without assets.
Its shares may then lose their status as business assets and the following CGT and IHT reliefs may also cease to apply
- CGT Business Asset Disposal Relief (BADR) on a disposal of shares.
- CGT Hold-over reliefs on a lifetime gift or transfer of shares.
- IHT Business Property Relief on death.

Extracting profits from the company prior to striking off

Purchase of own shares

A Purchase of own shares is unlikely to qualify for HMRC clearance if made in advance of ceasing trading.
A purchase of own shares may be Combined with a capital reduction. Again it would be expected that the company would continue to trade for a period after this in order to satisfy HMRC that the transaction has a trading purpose.

See Purchase of own shares/capital reduction checklist.

Dividends

Profits may be extracted by Dividends.
The company may have non-distributable reserves or losses, it may then be possible to execute a Capital reduction to distribute capital reserves.

Surplus cash on winding up

Many companies build up a surplus of cash over time. Excessive cash balances combined with other factors may affect:

Trading status for Corporation Tax rates and reliefs.
The treatment of distributions made to shareholders.
The availability of CGT and IHT reliefs in relation to disposals of share capital and capital distributions to shareholders.
See Surplus cash: CGT & IHT issues

Distributions made on striking off

In the event of striking off, up to £25,000 may be distributed as capital for tax purposes where conditions are met.
Provided that qualifying conditions are met, CGT BADR or Investors' Relief may apply.

Distributions made on liquidation

These are taxed as capital unless the TAAR or TiS apply.

Distributions on winding up: TAAR and Transactions in Securities (TiS)

Where tax avoidance is the main or one of the motivations for closing down a company. anti-avoidance measures can be applied by HMRC:

From 6 April 2016 the Transactions in Securities (TiS) anti-avoidance rules are extended to catch certain distributions on winding up:

A repayment of share capital or share premium: TiS tax clearance is recommended in respect of all repayments of share capital and share premium.
A distribution in respect of securities on a winding-up.
- TiS tax clearance may well be recommended prior to winding up a company.

From 6 April 2016, a Targeted Anti-Avoidance Rule (TAAR) was also introduced to target ‘phoenixing’. Distributions on a winding-up will be taxable as income if within two years the individual (or someone connected with them) carries on a similar trade or activity.

This expanded definition and TAAR will not extend to a Distribution on striking off, where the £25,000 limit mentioned above will instead apply.

Company/shareholder toolkits for ceasing trading

Cost effective tools to assist you through complex legislation:

Use the Virtual Tax Partner © Business Asset Disposal Relief Toolkit to check whether your share disposal (if not affected by the TAAR) qualifies for Business Asset Disposal Relief (formerly Entrepreneurs' Relief).