Jennifer Adams details the procedure and the tax implications when a company is struck off from the Companies House register.
Closing a company using the striking off process is used to bring companies to an end. In an ideal world, with agreement between directors/shareholders, no debts and for the sake of the completion of a few formalities, Companies House does the administration for you all for the princely sum of £10.
The striking off regulations can be found under Companies Act 2006 (CA 2006) Part 31 -
“Dissolution and restoration to the register” which permits the striking off of a company in two specific instances:
- CA 2006 s1003 - gives the directors the right to apply. The majority of directors must agree to the closure. Importantly, the company must be solvent: should debts remain then the company must use the winding-up route.
- CA 2006 s1000 - gives Companies House the right to strike off if there is reason to believe that it is no longer in business. Proof will be in the form of failure to submit accounts and/or non-response to letters sent to the company’s registered office (see Companies House is accelerating strike offs).
When no application can be made
A company cannot apply to be struck off if it is in the process of being wound up or is subject to an s895 CA 2006 scheme (ie a compromise arrangement between a company and its creditors or members). There is a three-month grace period if, prior to application, the company changed its name, traded, disposed of property or rights, or if bearer shares are in issue at any time.
Procedure: Director’s strike off
- Convene a board meeting and/or arrange for the board to pass an ordinary resolution to apply for the company to be ‘struck off’. Minute that the company has paid or will pay all its outstanding debts or obligations and ensure that this is done.
- If necessary, shareholders need to approve a special resolution recording any reduction in share capital (see ‘Bona Vacantia’ and ‘HMRC position’ section below); all directors to sign a solvency statement (dated no more than 15 days before the resolution is passed). Send a copy of the resolution within 15 days of being passed to Companies House plus solvency statement, statement of capital showing the changes and a director’s statement confirming the validity of the statements. The resolution takes effect when registered.
- Advise HMRC of the strike off by submitting a CT600 and accounts. Write a letter confirming the situation and undertakings of both shareholders and directors. If the directors are the main/only shareholders only one letter is necessary but the signatories should have both ‘director’ and ‘shareholder’ written under their names as appropriate. The company does not have to wait for a response from HMRC (although it may be advisable to do so) before paying all liabilities and distributing the remaining assets to shareholders.
- Deregister for VAT (and PAYE if relevant).
- Submit form DS01 (plus £10 filing fee) to Companies House signed by all directors (or the majority if there are three or more). This can be done online. Final Accounts are not required.
- Within seven days of submission send a copy of the DS01 form to all interested parties (eg employees, creditors, manager of company pension fund etc).
- On receipt of DS01 Companies House will register the information and place on public record, send an acknowledgement to the address shown on the form, publish a notice in The Gazette inviting objections as to why the company should not be struck off and send a notification to the company at its registered office address to enable it to object if the application is bogus.
- If no objections are filed within two months of publication a further notice is published in The Gazette confirming that the company has been dissolved.
- The directors can halt the dissolution process by submitting form DS02.
A company may need to perform a capital reduction on cessation in order to repay excess share capital. If share capital is returned to shareholders without going through the formal process then the distribution is illegal under CA 2006 s 829(2). Assets remaining after a strike off automatically pass to the Crown under the doctrine of "Bona Vacantia" (property without a legal owner). This can be avoided by ensuring assets or property are transferred or dealt with before a company is dissolved; the alternative is a formal winding up and that costs.
An asset can only be returned to a former shareholder either by restoring the company or by purchasing the asset from the Crown at open market value. The Crown is not obliged to sell the asset. Restoration can be implemented at any time within the following 20 years (although this is unusual and expensive).
Companies House will not strike off a company that has outstanding debts or obligations to HMRC. As from April 2020, HMRC will become a secondary preferential creditor for unpaid VAT, PAYE and income tax on any winding up. However, striking off is not winding up, which must be conducted by a liquidator. So the company must be restored to the register if HMRC wishes to make a claim for unpaid taxes at a later date.
Obviously, whether HMRC will pursue any tax owing will depend upon the amount, the likelihood of being able to prove that the alleged debt is payable, the likelihood of being paid and the ease of company restoration. Restoration of a company that has been subject to a compulsory strike-off is by a paper form, restoration of a voluntary strike off requires court action.
Shareholders’ tax position
Payments to shareholders under a formal winding up are taxed as capital. Assets distributed on a striking off are deemed as capital chargeable to CGT rather than income to a maximum amount of £25,000 (possibly covered by entrepreneur relief) – any amount in excess of this is charged to income tax payable on the whole amount.
Most private companies have a nominal capital of £100 or less but as an example, where the company has share capital of £10,000 and distributable reserves of £30,000 then the share capital will be subject to the CGT regime, but as the £30,000 exceeds the £25,000 limit then the whole £30,000 will be subject to income tax. Therefore, companies that have higher than the limit in assets but wish to have the distributions treated as capital must go down the formal winding up route.
If a distribution is made and after two years the company has still not been dissolved or has failed to collect its debts and pay off its creditors, then the distribution remains as a dividend taxable under the income tax rules.
1. Where a company has in excess of £25,000 in assets it might be tempting to distribute profits by dividend before strike off leaving less than £25,000 in the company and then claim for the remainder as capital. However, such dividends could be considered by HMRC not be a distribution at all under CTA2010 s1030a rules and if this is the case, then all payments would be subject to income tax with the capital treatment for the remaining £25,000 being lost. Of course, a dividend paid in connection with the cessation of trade need not necessarily mean that the company is intending to be stuck off – it may merely mean that the company has no need to retain so much as working capital.
2. The Targeted Anti-Abuse Rules introduced to combat 'phoenixing' (the practice of closing one company and starting a new one immediately) only applies to distributions made on winding up. It does not apply on striking off.
3. Under a strike off, Companies House will not normally pursue any outstanding late filing penalties unless the company is restored to the register at a later stage.
4. Resolution and minutes templates can be found on this SimplyDocs link.