With falling interest rates, we often expect business growth to follow. However, despite this, many companies continue to close their doors. According to recent statistics from the Insolvency Service, the number of registered company insolvencies in England and Wales in April 2024 was 2,177, an 18% increase from March 2024 and the same month in the previous year.

When a business fails, there are several tax implications to consider. The immediate impact is typically the cessation of trade, which can accelerate the date when the company must pay its tax liabilities. Additionally, any expenses incurred after the business stops trading (known as post-cessation expenses) can be offset against post-cessation receipts or, in some cases, be relieved as losses against total income or chargeable gains.

Handling Losses

Efficiently managing losses is crucial when a company ceases to trade. The main reliefs include:

• Offsetting cessation losses against the company’s other profits for the same period.
• Carrying back losses against total profits of the previous period.
• Carrying back losses from the final 12 months before cessation against total profits from the previous three years on a ‘last in, first out’ basis.

Sale of Assets

When a business stops trading, it often needs to sell its assets. For capital allowances purposes, this can mean a deemed disposal of any plant and machinery. The sale of chargeable assets might result in a capital gain, leading to a significant tax liability, especially if property is involved.

Tax Planning Tips:

1. Sell Assets Before Ceasing Trade: Ideally, sell assets before stopping trade to offset any losses against the corporation tax bill.
2. In-Specie Distribution: Consider making an in-specie distribution (dividend comprising the asset). The market value of the asset is treated as a taxable distribution in the hands of the shareholder. Personal tax will be payable at the shareholder’s marginal dividend tax rate, but no Stamp Duty Land Tax (SDLT) will be due.

It’s important to ensure that the asset isn’t sold at an undervalued price. During insolvency, a court can reverse transactions made within two years before liquidation if they were not made in the belief that the company could continue trading.

Handling Distributions

When a company fails, paying off directors’ loans before other creditors can be seen as ‘preferential treatment’ and is not allowed. However, if the company has surplus funds after paying all creditors, it can make distributions to shareholders.

Key Points on Distributions:

• Capital Distributions: Distributions during the winding-up process are treated as capital distributions and, if conditions are met, subject to capital gains tax.
• Business Asset Disposal Relief: This relief allows a 10% tax rate on capital distributions if the total amount paid to all shareholders is less than £25,000. If the amount exceeds £25,000, shareholders pay income tax at dividend rates: 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate), after considering the £500 dividend allowance for 2024/25 and any available personal allowance.
• Formal Liquidation: To benefit from capital gains treatment, companies distributing more than £25,000 must enter into formal liquidation.

Dealing with tax implications when a company fails requires careful planning and a solid grasp of tax laws. By effectively managing losses, planning asset sales, and handling distributions, businesses can reduce their tax responsibilities and adhere to legal mandates.