The blog highlights the results that occur after a company is made subject to administration or liquidation that is the part of the company’s winding up. The consequences that arise in the case of a company buying its own shares, are also discussed.
Process of Winding Up for the Companies
As soon as the winding up process starts, the commencement of a new accounting period takes place. Once this happens, the periods of accounting are equivalent to 12 months till the process of winding up gets completed. The distributions that are made during the winding up process are known to be capital. When the companies enter the administration, some specific rules are applicable in relation to the accounting periods.
Any company that is subject to liquidation has to make the payment of the corporation tax on the profits that arise during the process of winding up.
As soon as the winding up starts, a preceding accounting period terminates and gives rise to a new beginning to the accounting period. Once this happens, the accounting periods terminate only after every year after the date of commencement of the winding up process and continues till the final period that terminates once the company is done with the winding up. A stopping of the trade due to the commencement of winding up will not result in the ending of the accounting period.
The 2002 Act of Enterprise allows the companies that have done company registration UK to shift from liquidation to administration. When a company stops being in administration and a new accounting period starts when the previous accounting period terminates, as soon as the company makes its shift from liquidation into administration.
As compared to the position in liquidation, in which the accounting periods of the corporation tax are and then rendered yearly from the liquidator’s date of appointment, there is no need to change the date of accounting. That is why, the upcoming accounting periods in administration follow the original dates of accounting.
A UK incorporation, say company A has a normal date of accounting of December 31 every year. The appointment of an administrator is done on August 17, 2013. Resultantly, the accounting periods for the company for the purposes of corporation tax will be January 1 to August 16, 2013 prior to administration and the period after the appointment of the administrator will be August 17 to December 31, 2013. Then, in this scenario, the accounting periods will be December 31 every year while the company is in the administration.
When the ceasing of an administration takes place, it is mandatory that a new accounting period starts for the purposes of tax, whether the open limited company UK chooses to come out of administration by starting its trade back again normally or it chooses to shift from the administration to winding up.
Suppose that an open limited company UK, A Ltd happens to stay in administration for the period of 14 months and the appointment of a liquidator is done on October 10,2014. Hence, the administration’s accounting period will be from January 1, 2014 to October 9, 2014. Then the next period of accounting will be the first accounting period of liquidation, that is, October 10, 2014 to October 9 2015. Accounting periods then will be yearly till October 9 till the company decides to cease to be in liquidation, either by returning to administration or by striking off.
When a company shifts itself from liquidation to administration, it is mandatory for a new accounting period to start. Once again, this allows the proper calculation of tax that remains due as a cost of administration or liquidation.
As mentioned in the example above, suppose that company A stays for three months in the phase of liquidation, and a court order is granted on January 14, 2015 that appoints a new administrator. In this case, the accounting periods are then October 10, 2014 to January 13, 2015 in liquidation, and for the case of administration, the duration is assumed to be from January 14 to December 31, 2015.
If the company had remained in the liquidation for a specific amount of time, causing the preparation of accounts of liquidation to October 9 for a count of years, the accounting periods after the liquidation would terminate on October 9 yearly unless a change was made by the administrator in the reference date of accounting.
The accounting periods in which the capital profits, income and losses fall will be affected by the date on which an accounting period terminates. This can restrain the acquiring of relief in the most advantageous way. As an example, consider that the losses of trade of the present or the ongoing year or carried back can be set against other gains or income, whereas the losses of trade that are carried forward can only be set against the profits of trade. Hence, the capital gains may be liable to tax if they are made after the stopping of the trade even if there exist unrelieved losses of trade.
The distributions that are made once the liquidation commences are capital and considered as a part disposal of shares in the control of the shareholder. This is the position even if the distributions make an inclusion of accumulated total profits of the ltd formation UK, out of which the payment of the dividends can be made.
In the case where a company has profits of the distributable type, it is then preferred to make the payment of these as a dividend before the beginning of a liquidation. Any such kind of distribution will be liable to income tax on an individual shareholder.
Assets that are distributed by the liquidator in their present form or in specie and not distributed and sold as cash are supposed to be subject to disposal at the market value. In the case where the assets are chargeable assets, any occurring chargeable gain is charged to corporation tax according to the rules in normal manner. As a consequence, there is a double taxation on assets that are distributed to the shareholders in liquidation as the distribution of the assets will also be considered as a distribution of capital in the control of the shareholders. However, it is important to note here that an availability of disincorporation relief to refrain from this double liability of tax is present.
In an ordinary manner, the assets that are distributed outside a formal winding up represent a distribution of income. The occurrence of this is possible before an application to strike the company off the companies register which is a less expensive way of finishing the existence of a company than a formal liquidation.
However, the distributions that are made to anticipate such an application in order to strike off a ltd formation UK in the presence of restricted circumstances, are considered as the capital receipts of the shareholders in order to fulfill the purpose of the computation of chargeable gains occurring to them on the disposing of the shares. This can or cannot prove beneficial to the shareholders.
In order for this treatment to be applicable, the following conditions need to be met:
If the dissolving of the company has not occurred two years after the making of the distribution, or has shown failure to secure the payment of all net amounts due to it, or to satisfy all its liabilities and debts, then the treatment of capital is not applicable.
A substitute way for the distribution of assets outside a formal winding up is to make use of the provisions of the 2006 Companies Act to deduce the company’s capital before actually striking off. A distribution that is made after reducing the capital will automatically be considered as a distribution of capital and hence, the conditions mentioned above for the treatment of capital do not need to be fulfilled.
When a manager, receiver or an administrator is appointed and as a result, there are no consequences of tax, except the determination of accounting periods, as discussed earlier.
When a company is placed into liquidation, then the beneficial ownership of its assets is lost. In case of the company that has to be liquidated being a parent company, then it will lose its relationship, that is the group relationship with its previous subsidiaries. No availability of group relief is present to any of the companies in the previous group. As a contrast, a group will continue to exist for the purposes of chargeable gains, although not withstanding the starting of liquidation.
What Happens when a Company Buys its Own Shares?
When a company buys its own shares, then they may be liable to tax on the vendor shareholder as the receipt of a distribution of income or as capital proceeds in the case of specific conditions being satisfied.
If a company makes a purchase of its own shares for more than the amount that was subscribed in an original manner, the general rules of tax give a statement that there is a distribution of income of the excessive amount acquired over the subscription. This is known as the treatment of income.
The recipients of such distributions are taken into account in the same manner as the recipients of the ordinary dividends. This leads to the fact that the basic rate payers of tax do not have to make the payment of any further tax. And the higher rate and additional rate payers of tax should make the payment of the further tax.
The remainder of the proceeds that are not considered as the income will be considered as a capital receipt. Hence, there can also occur a disposal of the shares by the vendor shareholder for capital gains tax. If originally, the vendor shareholder made a subscription of the shares, then this will not result into any losses or gains, as the shareholder is hardly getting back the cost of subscription as the proceeds of the disposal. However, in case if the vendor shareholder got hold of the shares by any other way than the subscription, such as by making a purchase, a gain, or as a more usual practice, a loss may occur. The proceeds of the disposal is equivalent to the original cost of the subscription, as this is the capital amount acquired by the shareholder on the company making a purchase of the shares.
When an unquoted company of trade or the trading group’s unquoted parent makes the purchase of its own shares in order to prove advantageous to its trade, and if some specific other conditions are met, then the treatment of capital is automatically applicable. This leads to the result that the treatment of the distribution is done in the form of a capital receipt for making the disposal of shares by the shareholder instead of a distribution of income.
According to the existing capital gains tax rules, the payable tax can be made less as a result of the treatment of capital, specifically when the disposal makes a qualification for the relief of entrepreneur, than if the treatment of income is applicable.