A company with financial difficulty may go into administration and continue to trade. Whereas, liquidation ends the existence of a company. This document covers the tax implications on these, together with the informal winding up; effect on accounting periods; close investment holding company rules; tax deduction for expenses during liquidation; redundancy payments; utilization of tax losses; group relief; substantial shareholdings exemption; and distributions.

This guidance note considers the tax implications of a company going into administration or liquidation.

Introduction

Administration

A company which is in financial difficulty may go into administration. An administrator is appointed to manage a company's affairs whilst it is in administration. It usually continues to trade during the period of administration.

The function of the administrator is to fulfil objectives, in this specific order:

  1. rescuing  the company as a going concern
  2. achieving  a better result for the company's creditors as a whole than would be likely if  the company were wound up, and
  3. realising  property in order to make a distribution to one or more unsecured or  preferential creditors

Insolvency Act 1986, Sch B1, para 3 (subscription sensitive)

These are not a choice but a hierarchy. The rescue of the company is the priority.

An administrator can be appointed either out of court or with a court order. Out of court, an administrator can be appointed by the company, the directors or the holder of a qualifying floating charge.

Liquidation

Liquidation brings the existence of the company to an end. On completion of the winding up the company is dissolved. Liquidation can be voluntary or compulsory (defined below). In either case the liquidator becomes the beneficial owner of the company's assets and is responsible for the payment of all corporation tax liabilities arising after the commencement of winding up. A liquidator is appointed to sell all the assets, pay all the debts and return any surplus capital to the shareholders of a company in liquidation.

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