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Since the replacement of ESC C16 by a statutory instrument, the process for closing a company has changed significantly. The new legislation effectively puts a cap on the tax advantage that can be gained on the closure of a company by prohibiting a company with reserves in excess of £25,000 to be informally wound up. Companies looking to close since 1st March 2012 with reserves in excess of £25,000 must now be liquidated formally in order for the proceeds to be treated as capital receipts in the hands of shareholders.
A Members Voluntary Liquidation is where a company is put into liquidation by its shareholders when it has ceased to trade. This type of liquidation is only available to companies that are solvent (a company that can meet its obligations as they fall due) where the shareholders have taken the decision to liquidate (opposed to the creditors, where the company is not solvent).
Nixon Williams is a licensed insolvency practitioner offering liquidations to contractors for an all-inclusive fixed fee package. For more information on this, please contact your accountant.
When a company is in liquidation, any distributions made to shareholders during this time will be treated as a return of capital. This will therefore be subject to Capital Gains Tax rather than Income Tax (on dividends), if the gain is eligible to entrepreneurs relief then it will be taxed at 10% (after the £12,000 annual allowance has been deducted), if Entrepreneurs relief does not apply then the gain will be taxed at 10% or 20% depending on your other income.
In order to qualify for entrepreneurs relief, the following criteria must be met:
Following the appointment of the liquidator, it is likely that in most cases the distribution of cash will be made to the shareholders within approximately six to eight weeks, but this does depend on the time it takes HMRC to reply confirming no amounts are owed. The liquidation will normally be closed within six months from the appointment and the company will be formally dissolved at Companies House after three months of the case being closed.
For more information on insolvency services, please contact your accountant.