Closing Company With > £25,000 Reserves

Closing Company With > £25,000 Reserves

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This is the first time I have come across this under the new rules

There will be around £70k in the bank - how do we close the company?   Is it by dividend?

Does the closing balance sheet show the final distribution?

Replies (8)

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By nick farrow
07th Jul 2014 10:22

I would have thought the company would ideally need to pay the divi (to get reserves below £25k) prior to cessation of trade and thus prior to submitting the DS01

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By Maslins
07th Jul 2014 10:34

Depends upon the personal tax situation of the individuals concerned.  With >£25k, the only way to get CGT treatment (potentially benefiting from entrepreneurs relief) is to get a formal members voluntary liquidation done.  Sister company of ours MVL Online offers these for simple cases more affordably than most high street practitioners.

Take care with Nick's suggestion.  If the company has already ceased to trade, then any funds paid out now would likely be deemed to be as part of the close down.  If there's £70k, artificially saying £46k is paid as dividends leaving £24k to be paid out as closing funds may well be met with challenge.

Other options would be hefty pension contribution, or perhaps if the individual's other ongoing personal income is fairly low, then possibly drip feeding dividends over a few years.

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Replying to Wilson Philips:
By JCresswellTax
07th Jul 2014 14:06

Perfect advice.

Maslins wrote:

Depends upon the personal tax situation of the individuals concerned.  With >£25k, the only way to get CGT treatment (potentially benefiting from entrepreneurs relief) is to get a formal members voluntary liquidation done.  Sister company of ours MVL Online offers these for simple cases more affordably than most high street practitioners.

Take care with Nick's suggestion.  If the company has already ceased to trade, then any funds paid out now would likely be deemed to be as part of the close down.  If there's £70k, artificially saying £46k is paid as dividends leaving £24k to be paid out as closing funds may well be met with challenge.

Other options would be hefty pension contribution, or perhaps if the individual's other ongoing personal income is fairly low, then possibly drip feeding dividends over a few years.

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Replying to Wilson Philips:
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By Swedish Chef
08th Jul 2014 08:48

Pre-liquidation dividends

Maslins wrote:
Take care with Nick's suggestion.  If the company has already ceased to trade, then any funds paid out now would likely be deemed to be as part of the close down.  If there's £70k, artificially saying £46k is paid as dividends leaving £24k to be paid out as closing funds may well be met with challenge.
Apparently, there is a difference between paying a dividend before liquidation and a "pre-liquidation dividend". It is true that HMRC are likely to challenge a situation where a dividend is paid in order to reduce reserves to under £25,000 to get capital treatment without the cost of a formal liquidation. However on a recent course held by Giles Mooney, he explained that a situation was put to HMRC where:

Monday - board meeting - "oh we have retained profits, let's pay a dividend"

Tuesday - board meeting - "Shall we think about winding the company up as we have no further use for it? We can do this informally as reserves are under £25k"

Wednesday - board meeting - "good idea, let's do it"

Providing it was all minuted correctly (and of course was reflective of what actually happened), HMRC confirmed they would not challenge this - because payment of the dividend is identifiably separate from, and before, the consideration to wind up. Mention the winding up before, or at the same time as, the dividend, and you have a problem.

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Replying to kevinringer:
By JCresswellTax
08th Jul 2014 09:08

Thanks for this

Swedish Chef wrote:

Maslins wrote:
Take care with Nick's suggestion.  If the company has already ceased to trade, then any funds paid out now would likely be deemed to be as part of the close down.  If there's £70k, artificially saying £46k is paid as dividends leaving £24k to be paid out as closing funds may well be met with challenge.
Apparently, there is a difference between paying a dividend before liquidation and a "pre-liquidation dividend". It is true that HMRC are likely to challenge a situation where a dividend is paid in order to reduce reserves to under £25,000 to get capital treatment without the cost of a formal liquidation. However on a recent course held by Giles Mooney, he explained that a situation was put to HMRC where:

Monday - board meeting - "oh we have retained profits, let's pay a dividend"

Tuesday - board meeting - "Shall we think about winding the company up as we have no further use for it? We can do this informally as reserves are under £25k"

Wednesday - board meeting - "good idea, let's do it"

Providing it was all minuted correctly (and of course was reflective of what actually happened), HMRC confirmed they would not challenge this - because payment of the dividend is identifiably separate from, and before, the consideration to wind up. Mention the winding up before, or at the same time as, the dividend, and you have a problem.

Always interested in what Giles has to say!

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By Steve Kesby
08th Jul 2014 11:56

Careful

Let's not forget that HMRC issues swathes of written guidance, none of which it considers itself bound by.

In that context, I'd be particularly wary of relying on some fourth-hand example that was "put to HMRC" and came to you by way of Chinese whispers.

There are two legs to the legislation. The first leg refers to the procedure for dissolution under CA 2006, s. 1000 (striking off by the registrar, usually for non-filing) has commenced and distributions are made in anticipation of that dissolution, then provided those distributions (made in anticipation of the dissolution) are no more than £25K capital treatment applies.

Now, in that case, if you can get the assets to under £25K before the registar commences the procedure, no prior distributions can fall within the "in anticipation" part, because the legislation effectively excludes any "anticipation" before the procedure is commenced.

The second leg though applies where the company has made, or intends to make, an application under s. 1003 (pay £10) and dividends are made in dissolution.

Taking Swedish Chef's example, it could be argued that the minuted actions on Tuesday and Wednesday were pre-ordained, along with Monday's business, while the directors were down the pub with their accountant on the preceding Saturday night, such that Monday's dividend was made in anticipation of the already intended striking off.

That way both Monday's and Thursday's dividends get taken together and totalling £25,001 mean that they're both taxed as income distributions.

That is what the legislation says.

Even if HMRC acknowledged what Giles Mooney had said in written guidance, we can't rely on it.

An example that was apparently "put to HMRC" and arrives to you by the word of mouth of someone, who may or may not have even been there when it was put to them, must, to my mind, have even less reliance placed upon it.

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By Swedish Chef
08th Jul 2014 12:12

If I recall correctly.....

...it was Giles himself that put the question to HMRC, so I would certainly not class it as "Chinese Whispers"... though I do accept your point.  It is certainly a policy that should be approached with caution

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By nick farrow
08th Jul 2014 12:27

i enjoyed Giles too

I enjoyed Giles' lecture too!

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