Striking off a company? Increased cost, timeframe and complexity from 14 October 2011

A company may be struck off without the need for a formal liquidation under the Companies Act 2006, provided certain conditions are met and procedures are followed.  This can provide a low cost and relatively straight forward means of dissolving a company without appointing a liquidator.

Guidelines designed to allow share capital of up to £4,000 to be paid out to shareholders as a result of such a strike-off and not to be treated as the property of the Crown (under the Bona Vacantia or ownerless property rules), are to be withdrawn from tomorrow, 14 October 2011.

Companies can, in the interim, still be struck off without appointing a liquidator, but they must first reduce their share capital, to ensure payment of funds to the shareholders, rather than to the Crown. An easier method of reducing a private company’s share capital was introduced in the Companies Act 2006, and generally, the repayment of share capital will be treated as a capital receipt in the hands of the shareholders.

Katharine Arthur, Tax Principal, comments: “The £4,000 protection is being withdrawn at very short notice, and will not allow companies time to finalise even those strike-offs currently under way. From Friday companies must take greater care: it will be essential first to reduce the company’s share capital before proceeding to strike it off. It is vital that professional advice is sought to understand the legal requirements and tax treatment at each stage.”

ESC C16

A further obstacle to striking off companies may follow shortly, if draft legislation limiting the benefits of an HM Revenue & Customs’ concession (ESC C16) is enacted. ESC C16 allows distributions to shareholders on a strike off which would otherwise be subject to Income Tax, to be treated as capital in the hands of the shareholders. This can be a very valuable concession, given that Capital Gains Tax rates (at between 10% and 28%) are currently considerably lower than Income Tax rates (up to 50%).  The legislation, as currently drafted, would tighten the conditions to be met and would limit capital treatment to situations where the total assets to be distributed are £4,000 or less. Companies with greater total assets will have to appoint a liquidator.

Mick Sanders, Corporate Recovery Principal, comments: “The striking off of companies and the securing of capital treatment for shareholders is still possible, whilst we await confirmation of the enactment of the draft legislation which we understand will replace ESC C16. Companies with significant assets or a commercial risk of claims against the company or its directors may however be better advised to consider a formal liquidation, now and in future.”

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For further information on and assistance with share capital reductions, striking off companies and formal liquidations, please contact your local office or email your enquiry.