Tax planning

Tax planning

Tax code for bankrupt

In the tax year that an individual is made bankrupt, he is given a nil tax code (NT). If he is employed, he will receive increased net pay, as not PAYE tax would be deducted. The increase in net pay as a result of the change in tax code is usually required to be paid over to the official receiver.

The nil tax code is more advantageous for individual engaged in business as there will be no tax payable for the year. Consideration should be given to the timing of going bankrupt as to maximise the period where the individual can have effectively tax free income.

Members Voluntary Liquidation

A members voluntary liquidation can be a tax efficient exit strategy for the shareholders of a solvent company. Distributions to shareholders prior to liquidation are normally treated as income. Any distribution made by a liquidator is treated as capital. The rate of tax payable in a capital distribution is generally less that that applied to a revenue distribution.

Extra Statutory Concession C16

Distributions from companies are usually treated as income distribution within Section 209, ICTA 1988. In most circumstances, and providing that certain assurances are given to the Inspector before the event, the Revenue is prepared for tax purposes to regard the distribution as having been made under a formal winding up so that the proviso to Section 209(1) applies. The value of the distribution is then treated as capital receipts of the shareholders for the purpose of calculating any chargeable gains arising to them on the disposal of their shares in the company.

The assurances include:
The company

  • does not intend to trade or carry on business in future; and
  • intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
  • intends to seek or accept striking off and dissolution.

The company and its shareholders agree that

  • they will supply such information as is necessary to determine, and will pay, any Corporation Tax liability on income or capital gains; and
  • the shareholders will pay any Capital Gains Tax liability (or Corporation Tax in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made during a winding-up.

H M Revenue & Customs has come out with a consultation document proposing restricting ESC 16 to companies with assets under £4,000, approximately equivalent to the cost of putting a small, solvent company into Members' Voluntary Liquidation.

The consultation period ended on 7 March 2011. If the proposed change becomes law under the Corporation Tax Act 2010, then a formal Members' Voluntary Liquidation will be the only way of achieving a distribution to shareholders as a capital receipt rather than income, for distributions over £4,000. Business advisers will have to consider whether the tax benefit to shareholders in terms of receiving a distribution as a capital receipt rather than an income dividend will outweigh the cost of appointing a Liquidator.

The figure of £4,000 is based on the average cost of liquidation. In many cases liquidators will offer to undertake this work for fixed fee. The fee will be dependent on the complexity of the case.

Distributions in Specie

A liquidator can make a distribution in cash, or in specie. A distribution in specie is basically one made other than in cash. The liquidator is not bound by market value transfers if the company is solvent. There is a potential to reduce or eliminate SDLT being payable on property transfers.

When a company is placed into liquidation, a new period for corporation tax begins. Any trading and capital losses and group relief can no longer be utilised. They should therefore be considered prior to the commencement of the liquidation process.

There are provisions under the Companies Act for a company to be restored to the register. This may cause some difficulties of the there are any contingent liabilities or other onerous contracts such as leases. This can provide a great level of assurance to the directors and shareholders of a company.

The liquidator has the power to disclaim leases. The liquidation process provides contingent creditors the opportunity to submit their claim against the company.