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Informal strike off and overdrawn DLA at cessation

Informal strike off and overdrawn DLA at cessation

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Hi,

I am looking for some assistance regarding an informal strike off query if possible.

We work with a client who has taken the decision to strike their company from the register owing to their net assets being £18,500 at the date of cessation (falling below the £25,000 limit).

In the cessation accounts, the balance sheet consists of:

  • Overdrawn DLA - £18,500
  • Bank - £20,000
  • Corporation tax - £20,000
  • Equity - £18,500

As you will note from the above, the remaining equity is exactly the same as the overdrawn DLA and it is our understanding that the overdrawn DLA can be reconciled as a distribution of capital in specie and as a result of this the client will be able to utilise their CGT annual exemption and the remainder would be subject to CGT at 10% under ER.

When time allows, I would be grateful if you could let me know if this would be an appropriate approach based on your understanding of the striking off process.

Thanks in advance.

Replies (12)

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By Maslins
26th Mar 2018 13:01

In a word, "yes".
The timing of the taking and clearing of the director loan may be relevant, from an S.455 perspective.

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By SteLacca
26th Mar 2018 16:08

You may not even need to consider ER if the gain after exemption falls within your client's normal BR band.

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By whitevanman
26th Mar 2018 16:39

To say the overdrawn DLA can be "reconciled" as a distribution in species gives me a little concern. To give the answer "Yes" - likewise.
It is important to get things right to avoid unpleasant surprises.
Firstly, there is an overdrawn DLA and therefore, possibly, a S455 charge (which may have been paid). To obtain relief from this charge, the loan must either be repaid or writen-off. The former does not generate a personal liability whereas the latter does. So you need to ensure that what is done, effectively repays the loan and cannot be construed as a writing-off.
Secondly, any distribution is chargeable in the hands of the recipient. The legislation provides however, that a distribution made in the course of a winding up, is to be taxed as Capital (giving the desired result). So the distribution in species would have to be shown as being made in the course of a winding up if it is to be treated as Capital.
I am not sure there is any such thing as an informal striking off. The company can seek striking off (or simply be struck-off) without having been subject to a formal liquidation process but that would make the distribution (strictly) income.
To help companies avoid unnecessary and costly liquidation whilst retaining the advantageous tax treatment, HMRC issued Extra Statutory Concession C16 which set out that, in certain circumstances HMRC would accept that, subject to following the correct process, they would treat a distribution AS IF it were made in the course of a winding up (effectively as Capital). The £25000 limit for this "informal" process is a statutory rule of fairly recent years.
So you need to make sure that you have HMRC's agreement to what you propose and follow the correct process to avoid any nasty surprise.
The good news is that it is fairly easy and HMRC will usually agree.

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Replying to whitevanman:
By johngroganjga
26th Mar 2018 19:53

I disagree that prior notification to HMRC is required. The law is the law, and HMRC have to comply with it whether they like it or not. The law says that a distribution at, or in anticipation, of a winding up is to be taxed as capital (unless over £25k without a formal liquidation etc., and subject to the phoenixing rules).

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Replying to johngroganjga:
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By whitevanman
26th Mar 2018 21:24

I don't disagree what you say but I don't think I said that notification to HMRC was required. With respect, you appear to have missed the point of my post.
To say that the overdrawn DLA can be "reconciled" as something is to invite trouble. It is also important to ensure there is no problem getting relief from S455. So a simple letter to HMRC setting out what is proposed and putting on record the intentions will avoid any nasty surprise. If HMRC consider that the desired result does not follow, it would be incumbent on them to explain what and why. That would give the opportunity to put things right before it is too late. Better safe than sorry.

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Replying to whitevanman:
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By davidbarry
07th Feb 2019 09:59

'The former does not generate a personal liability whereas the latter does. So you need to ensure that what is done, effectively repays the loan and cannot be construed as a writing-off.'
So is it a case that either the charge falls on the ltd company or falls on the tax payer? I don't understand?
I would like to discuss this with you. Thank you.
David Barry

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By DSOUTER
26th Mar 2018 22:22

Thank you to you all for your responses.

I have a couple of follow up queries if you wouldn't mind obliging me:

1. When adopting the striking off approach, if a distribution is made in advance of the winding up, which is the case in my scenario, at what point would you consider the loan extinguished as part of the striking off process and then taxable as a capital distribution (date the distribution was received, the cessation date, the dissolution date)? Bearing in mind that the DLA won't be repaid and then taken back out within this scenario so there will be an asset in the cessation balance sheet.

Additionally, if a company is struck off (after all creditors have been settled in full) and the dissolution date falls outwith 9 months and 1 day of the cessation accounting
period end, what would happen with s455. Would HMRC have grounds to follow up on this even though in theory any s455 would be paid and then reclaimed so they wouldn't be losing out?

Thanks in advance.

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By andrew1211
27th Mar 2018 10:25

Dissolution date I would have thought.
HMRC might be pedantic applying the strict logic of s455 but I seriously doubt anything would come of it.

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Psycho
By Wilson Philips
07th Feb 2019 10:29

I'm late to the discussion, but a point to be wary of is HMRC's current take on the distribution of overdrawn loan accounts.

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Replying to Wilson Philips:
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By davidbarry
07th Feb 2019 10:34

What is HMRC's current stance then on the distribution of directors' loan account? Do you have experience in this field? Thank you. David Barry

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Replying to davidbarry:
Psycho
By Wilson Philips
07th Feb 2019 10:55

I don't have direct experience, but am aware that HMRC are taking a test case - their argument is that such distributions should always be taxed as income.

I don't know the details of the case, so don't know if HMRC are trying to apply section 684 of ITA 2007, GAAR or some other provision. In any event we'll need to wait and see if the courts agree with that view. In the meantime relevant clients should be advised to proceed with caution.

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Replying to Wilson Philips:
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By davidbarry
07th Feb 2019 13:08

Thank you.

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