Company Liquidations and Companies in Administration

It is a sad truth that many companies fail and this can occur for a variety of different reasons. The process of administration, liquidation and ‘winding up’ can be a long and arduous one – and, of course, financially fraught. In these circumstances, one would be forgiven for presuming that these worries would not be added to by corporation tax. This, however, is not the case.

Winding Up

When it is decided that a company is no longer capable of trading, the process of ‘winding up’ begins. This essentially describes the process by which creditors are paid off, and all remaining assets are fairly distributed to their owners or to shareholders.In many circumstances, this can result in profits being made during the winding up process.

If the company being wound up is still resident in the UK, these profits are subject to Corporation Tax in the normal way. This process also affects accounting periods. When a company begins to be wound up a new accounting period begins, specifically on the date that the relevant petition is presented to the court. As with any other accounting period, this will end 12 months after this date, or on the date that the winding up process ends.

During the process of a company’s liquidation, corporation tax must be treated as another expense. The individual in charge of the liquidation (known as the ‘proper officer’) has a responsibility to ensure that the relevant funds are held onto in order that the tax liabilities can be met.

There is, however, an order of priority for expense payments of companies in administration. Precedent suggests that it is unlikely for HM Revenue and Customs (HMRC) to demand payment of corporation tax due on profits accrued as a result of the realisation of assets during the liquidation process, if this will mean that there are insufficient funds with which to properly pay the proper officer.

However, corporation tax due on profits accrued from trading activities during the liquidation process will have a higher legal priority that remuneration of the proper officer.

Administration

The rules regarding corporation tax for companies in administration are very similar to those regarding companies in the liquidation process. Essentially, the role of the proper officer is taken on by the administrator, in the sense that they must assume the responsibility for ensuring that there are sufficient funds to pay any corporation tax liability that might occur.

Similarly, corporation tax will be due on any profits accrued from either the realisation of assets or any trading activity that occurs while the company is in administration, although these will count not as standard business expenses but exclusively as expenses incurred as a result of the administration.

Finally, slightly different rules exist for companies that are in administrative receivership. In these cases, it is important to remember that the administrative receiver bears no personal liability for any corporation tax liabilities that occur after their appointment. These liabilities must still be dealt with, however, and it is again their professional responsibility to ensure that sufficient funds are available to the company in order to pay these debts.