If your company is liquidated, you may wonder if you will have to pay taxes on any of the assets distributed to creditors. The answer depends on some factors, such as the type of liquidation and the status of your company’s debts. That’s why it’s important to seek corporate insolvency advice before taking any action to liquidate your company.
Here’s an overview of liquidation and whether you must pay corporate taxes after your company has been dissolved.
What Is Liquidation?
It is the process of selling a company’s assets and distributing the proceeds to creditors. The process can be voluntary, where the shareholders agree to dissolve the company, or involuntary, where a court orders the company’s liquidation.
Once a company is liquidated, it no longer exists and cannot carry on business. You most likely need to work with experts (see these professionals take care of insolvency in London) to guide you through the process and help you understand your obligations.
Two Types of Liquidation in the UK
In the UK, two types of liquidation exist, such as:
Compulsory Liquidation
This is when a court orders your company to be wound up, usually because it owes money to creditors and has no realistic prospect of repaying its debts.
Voluntary Liquidation
This is when the directors of a company decide to close it down and appoint a licensed insolvency practitioner (IP) to oversee the process. Voluntary liquidation can be either Creditors’ Voluntary Liquidation (CVL) or Members’ Voluntary Liquidation (MVL).
A CVL is usually used when a company is insolvent, which means it cannot pay its debts as and when they fall due. An MVL is used when a solvent company wants to close down and distribute its assets to shareholders.
Do You Need to Pay Taxes After Liquidation?
If your company is still in the process of winding up, you still need to pay any taxes that are due before the final distribution of assets.
At the beginning of your company being wound up, your current Corporation Tax ends, and a new one starts for 12 months until the winding up is complete. Your company needs to pay taxes from:
- Trading income and other types of income, such as investment income
- Capital Gains Tax on chargeable assets
However, if the company is insolvent, it’s unlikely that there will be any money left to pay any due taxes. The tax liabilities are transferred to the appointed IP when your company is wound up. They will then determine if any funds are available to pay tax debts and, if so, how much can be paid. HMRC may write off the debt or agree to a time-to-pay arrangement if no funds are available to pay tax debts.
Entreprenuers’ Relief
If you’re a shareholder in a company being wound up, you may be able to claim entrepreneurs’ relief on any assets that are distributed to you. Entrepreneurs relief liquidation allows you to pay a lower Capital Gains Tax (CGT) rate on the sale of certain business assets.
To claim, you must have owned the shares in the company for at least 12 months before they’re sold or transferred. The current CGT rate is 10%.
You can only claim entrepreneurs’ relief once the liquidation process is complete and you’ve received the proceeds from selling your shares.
In Conclusion
You may still need to pay taxes after your company has been dissolved, depending on the type of liquidation and the status of your company’s debts. It’s important to seek professional advice to ensure you understand your obligations and can claim any reliefs that you’re entitled to.
