TAX CONSIDERATIONS IN SOLVENT LIQUIDATIONS
The purpose of this note is to, briefly, examine the tax implications and issues
that may arise when a company enters into a solvent liquidation.
A liquidation, or winding up, is a process whereby a liquidator is appointed to
realise the company’s property and distribute the proceeds to its creditors and
thereafter distribute any surplus to the company’s shareholders.
The liquidator has responsibilities to all of the creditors of the company and he
becomes “the proper officer” of the company for tax purposes.
Unlike the position for insolvent liquidation, where there is very little scope for
tax planning as the sole concern of the liquidator will be to minimise
corporation tax liabilities and to maximise any claims or relief, in solvent
liquidations there may be considerable scope for the liquidator to undertake
some tax planning.
Affect of appointment
The corporation tax accounting period ends immediately before the day of
appointment of the liquidator and therefore the first day of liquidation becomes
the first day in the new corporation tax accounting period. Once the liquidation
has begun, the tax accounting period can only be brought to an end by the
expiry of 12 months following the start of the tax accounting period or the
conclusion of the liquidation.
The company in liquidation will lose beneficial ownership of its assets (Ayerst
v C & C Construction 50 TC 651) and therefore the company in liquidation will
be degrouped from its subsidiaries for group relief purposes. However, by
virtue of Section 170(11) of the TCGA 1992 a company in liquidation will
remain part of a capital gains group.
It is not clear in the cases of solvent liquidations (where shareholders may be
said to have significant influence over the liquidator’s actions) whether or not
shareholders continue to exercise control over the company for the purposes
of s.840 ICTA 1988. Where shareholder control is lost the company will no
longer be connected with other group companies for the purposes of transfer
pricing and loan relationship legislation.
Cessation of trade
The company is likely to cease trade on the appointment of a liquidator.
Where trade and assets are sold the current period trading losses should be
eligible to offset against any capital gains arising.
When a company stops trading a tax account period comes to an end
(Section 12(3) ICTA 1988) and any unrelieved trading losses are generally not
available to shelter income in subsequent periods. However, where post-
cessation trading income that is taxable under Section D Case VI arises, such
as the release of trading debts, Section 105 of ICTA 1988 allows trading
losses otherwise extinguished from cessation to be set against such income.
Excess management expanses and Schedule A losses cannot be carried
forward after the company ceases to carry out investment business and
property business respectively.
Excess loan relationship deficits and capital losses are unaffected by
cessation of trade and generally can be carried forward.
Where a loss arises in the final 12 months of trading it can be carried back to
earlier periods or, if appropriate, sold to a fellow subsidiary.
A liquidator will need to be very concerned with potential tax recovery. The
most likely claim is probably going to be under Section 393A ICTA 1988 for
the carry back of trading losses against tax and profits arising in previous tax
accounting periods. The normal loss carry back period is one year (to be
extended to three years, but capped at £50,000 if the proposals in the budget
2009 come into force). However, on cessation of trade the loss carry back
period is extended to three years (without any cap).
There may be no benefit in making carry back loss claims where the recovery
would be set off against other Crown debt and no return to unsecured
creditors is expected.
The liquidator may be able to obtain value for losses by a group relief
surrenders to other group companies. Capital losses can also be utilised
against gains arising in other group companies under Section 17A of TCGA
The key advantage of a sale of trade and assets (as opposed to a sale of
shares) is that the purchaser is allowed to cherry pick the assets and avoid
any historical exposure in the company. However, this would not enable
Newco to take over any accumulated trading losses.
In such a situation the liquidator should consider hiving the desired trade and
assets down to a newly incorporated wholly owned subsidiary and sell the
shares of that subsidiary. It should then be possible to transfer tax losses and
capital allowance tax written down values to Newco under Section 343 of
One risk that will need to be considered is that if, within three years of the
change of ownership, (either before or after or at the same time) Newco has
a major change in the nature or conduct of its trade then the trading losses
may be lost (Section 768 of ICTA 1988).
Furthermore, on the sale of Newco to a third party a tax de-grouping change
may also arise on the assets hived down. There are equivalent rules where
intangible assets are transferred (Paragraph 58 Schedule 29 Finance Act
2002). Any degrouping charge can however, be reallocated to a member of
the disposing group under Section 17A of the TCGA 1992.
Where a company is in solvent liquidation and where a loan relationship
liability is released by the lending entity a taxable credit may arise unless the
lender is a connected party.
This note is by no means exhaustive and the individual situation may provide
a myriad of other tax planning opportunities and/or pitfalls.
Chance Hunter Solicitors LLP