Striking off a company: Get the details right

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Jennifer Adams details the procedure and the tax implications when a company is struck off from the Companies House register.

When used

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:

  1. 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.
  2. 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.

Bona Vacantia

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).

HMRC position

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.

Practical points

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.

About Jennifer Adams

Jennifer Adams

Jennifer Adams is Consulting Editor of AccountingWEB and is a professional business author specialising in corporate governance and taxation. She runs her own accounting and consultancy business with offices based in Surrey and Dorset.

Replies

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By djn24
15th May 2019 10:23

This is a good article but from a practical point of view, it seems to me that:
The company stops trading, three month later they send in the ds01. They don't bother sending final accounts or corp tax return so HMRC have no idea that tax is o/s.
A few months later the company is struck off.
Not once in 20 years have I seen HMRC look to restore a company to recover o/s corp tax etc.
Admittedly all the examples that I have seen have debts in the 000's so probably quite small in the scheme of things.

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to djn24
15th May 2019 11:37

Exactly, I think this is how a great many small failed companies are disposed of, especially if the directors are broke and can't afford a formal winding up.

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By Ian Bee
to djn24
15th May 2019 11:59

I did this for a client a couple of years ago. Ceased trading, tax up to date and they sent in DS01. HMRC objected so we submitted a final tax return (nil) and company was struck off.

Since then I have done as Jennifer suggests and submitted final tax return then written to HMRC to say that the company is applying to be struck off but there were no transactions since the tax return that was submitted and no tax due. It's worked so far.

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15th May 2019 10:43

I agree 100% with djn24's comments.

Lots of small unwanted insolvent companies are dissolved under the DS01 procedure - most probably because HMRC and other creditors do not object.

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15th May 2019 11:32

Jennifer Adams wrote:

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.


To the best of my knowledge, form DS01 must be submitted on paper, though a DS02 (withdrawing a previous application via DS01) may be made online.
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to charliecarne
15th May 2019 14:37
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By norstar
15th May 2019 11:40

You forgot the most important bit - close any bank account(s) before sending in the DS01.

I've seen multiple cases where clients didn't do this, and then find to their horror that the account is frozen and/or proceeds sent to Prince Charly!

Better still, because they sent in a DS01, a simpler admin restoration can't be used.

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By sawebs
15th May 2019 11:53

1) "Importantly, the company must be solvent: should debts remain then the company must use the winding-up route"

I don't believe that is correct. Can you please point out where you get this from?

2) "Companies House will not strike off a company that has outstanding debts or obligations to HMRC"

Yes they will I believe. If a creditor objects they must follow this up with action e.g. petitioning for winding-up, otherwise the striking off will go through eventually.

3) You don't mention overdrawn Directors' Loan Accounts which will often feature in these cases. I have often wondered what the law says about these re income tax for the Director. HMRC manuals I believe say this should be treated in the same way as a dividend but AFAIK the law says the asset is bona vacantia and property of the Crown so they could in theory pursue it. Is HMRC's view just that - their view, as they would prefer the law to be, or is it backed up by any statute or legal precedent? I suspect they would argue that it is a written-off loan so taxable, but actually is it really written-off or just passed to the Treasury Solicitor? They could then pursue it indefinitely couldn't they?

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15th May 2019 11:57

this can now be done online, and it only cost £8 not £10:

https://guidedfiling.companieshouse.gov.uk/start?t=DS01&pk_campaign=Emai...

you need to register (one off)

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By CJaneH
15th May 2019 12:07

I can see why the law states all debts must be paid to use the DS01 but if a socially responsible director/shareholder has ensured all trade and government creditors has been paid this may result in the director being owed a few thousand and the company being insolvent. As the only creditor is the director/shareholder why should there be a legal objection.

I have always viewed that the directors stating there are no debts does not include them.

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15th May 2019 12:10

All sounds nice in theory....

However, from my own experience, two clients simply paid the fee and the company was struck off.

In the first place and since the main director (Daughter was a flim flam director) and after having signed a mandate for HMRC to pay to my practice a significant tax rebate (Thanks to all my hard work sorting out the unholy mess and rendering correct accounts and CT returns!) the duplicitous real director simply cancelled the mandate - without advising me! - took the rebate, screwed me for the fees and filed a striking out form.

The second was even worse: the two directors, screwed HMRC and what was then Customs and Excise etc and again filed a striking out form.

I pointed out to Companies House that the form was false and thus the Directors had perjured themselves stating there were no debts!

A sniffy man from Co's House suggested I paid a large sum to re-instate the company... for no purpose since it had been stripped of all monies and assets. HMRC were not bothered, either.

Reality? Do what the damned hell you like!

The setting up of "Long Firm" frauds has become a way of life for serious criminals in the UK.

https://web.archive.org/web/20100210111202/http://www.actionfraud.org.uk...

Government Agencies, including HMRC seem to have washed their hands of virtually all of their statutory regulatory duties.

Now, we do not take on any new incorporated instruction from new businesses without personal guarantees for fees from the directors.

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By sawebs
to Michael C Feltham
15th May 2019 13:01

I don’t believe it is necessary to clear all debts before applying for strike off. Where does it say otherwise?

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to sawebs
16th May 2019 18:17

@sawebs:

If you look carefully at the Co's Act, Directors are required to notify ALL interested parties which of course includes creditors.

Who would not usually agree to the debtor being struck off the register, since once the company is defunct, then there is no mechanism for creditors to try and obtain satisfaction.

If this is not done then the striking out application form cannot be used.

In both the cases I listed, I was not notified. Nor were HMRC et al.

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By sawebs
to Michael C Feltham
16th May 2019 23:06

Yes directors must inform all interested parties including creditors. Creditors can then object if they wish - in reality many don’t bother as they know there is no point if there are no assets or no chance of repayment. If there are objections Companies House will suspend the strike off for a couple of months. However if the creditor does not demonstrate they are taking action then Companies House will eventually strike off the company regardless. So yes, the DS01 procedure can be used whether there are outstanding debts or not.
Once the company is struck off a creditor can apply to restore the company to the register to pursue its debt for up to 20 years so there is still that avenue to pursue payment.

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15th May 2019 14:22

Good article, though getting Bank balances and other assets out of Company at cessation is very much a mute point.

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16th May 2019 17:58

The problem with the striking off procedure is that it is abused. Director's accumulate a massive DL don't pay corporation tax, VAT and PAYE and then apply for the company to get struck off.

They set up a new company the following day and start the process all over again.

It is only a matter of time before those the abuse the system, ruin it for the legitimate businesses. This has already started with HMRC moving up the creditors rankings on insolvency for VAT and PAYE. What next? Making it compulsory for a liquidator to dissolve companies getting rid of the strike of procedure? Who knows.

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By sawebs
to Adam12345
16th May 2019 23:11

Who is going to pay the £5k minimum for liquidation? The directors with no assets? The taxpayer? Throwing good money after bad?

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21st May 2019 08:46

It costs £10 to strike off a company

https://www.gov.uk/strike-off-your-company-from-companies-register/apply... or

https://www.gov.uk/government/publications/company-strike-off-dissolutio...

>>> and in reply to sawebs comment re not incl comment re Directors loan...I'm restricted to 10,000 words (although this one is 1300 ... dont tell Tom!)

Plus... re Co House not striking off if there is an HMRC debt... the text is correct. Its not Companies House that has the final say. Companies House wont strike off but waits until HMRC has confirmed that they do not object.
Up until recently invariably HMRC didnt bother pursuing less than £10K. Things have poss changed now they are preferential creditors.

And there is a mechanism for creditors to obtain satisfaction. I've used it myself. You can buy the right to sue the directors personally. I wrote an article about this a while ago but in an update it appears to have been lost. I'll resurrect and load.

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