You can read my first article here
The accounting issues
The first point to consider for a business is whether the entity is solvent, i.e. has an excess of assets over liabilities. If so, it can be struck off the Register of Companies or put into Members’ Voluntary (solvent) Liquidation (“MVL”), subject to various pre-conditions and dealing with the issues described below. If not, it is possible to strike off an entity if its only liabilities are to group entities, although tax advice should be taken beforehand. It is also possible to make an entity solvent by debt waiver, issue of additional capital or capital grant, but again tax advice should be taken beforehand.
It is advisable to ensure that all assets have been realised and all liabilities paid or dealt with before moving to elimination, if only because the ownership of assets remaining at dissolution passes to the Duchy of Lancaster (Prince Charles) and creditors are entitled to interest at 8% in an MVL from the date of liquidation to the date of payment of the claim.
Dealing with all assets and liabilities often means that the last assets (or liabilities) to be dealt with are inter-company balances. Tax advice should be taken before considering waiving or not paying any such liabilities, particularly if the debtor and creditor are in different tax jurisdictions.
The commercial issues
Before a business eliminates an entity, it is essential that detailed due diligence is undertaken to identify any banking, compliance and risk, insurance, IT, intellectual property, litigation, property, or regulatory issues are identified and dealt with beforehand. A business should also consider whether the name of the entity has any commercial or other value and requires saving.
Entities often have “hidden” assets or liabilities which are not shown on their latest balance sheet but can be identified by reviewing the financial statements for the last 12 years, the director and shareholder minutes and other such sources. Again, these assets or liabilities will need to be dealt with before elimination of an entity.
The tax issues
It goes almost without saying that all tax liabilities need to be agreed and settled, the entity deregistered for VAT, the PAYE / NI scheme closed, Corporation Tax, Stamp Duty and all other taxes dealt with, prior to elimination.
The return of capital to shareholders in an MVL may generate a capital gain or loss and that loss may be capable of use elsewhere in the group to mitigate tax liabilities. And tax planning and advice will be needed to mitigate any tax liabilities arising on a gain.
Tax issues are often a key issue and driver in CS and early consultation with tax specialists is recommended.
Pitfalls to avoid when undertaking corporate simplification
There are many pitfalls to avoid and this brief article can only mention a few.
- Where an entity has sold its business and assets and warranties have been given to the purchaser in the business sale agreement, it is often not possible to eliminate the entity unless the warranties have expired, or agreement of the purchaser has been obtained. Assets can be transferred intra–group without generating a taxable gain, but this gain may become taxable if the relevant entities leave the tax group, as they would on elimination.
- Where an entity has assigned a lease and the subsequent assignee becomes insolvent, it is possible for the lessor to claim against the original assignee.
- Care should also be taken to deal with VAT groups, pension schemes, group liabilities such as cross- guarantees and other such issues and liabilities before moving to elimination.
Our Corporate Simplification team
Our Corporate Simplification team are well-established and have advised a broad range of businesses including a global car manufacturing group and a global professional services group on these issues.
The above article constitutes general simplified advice and should not be acted upon without taking specific advice on the particular facts. Neither the author nor Quantuma Advisory Limited accept responsibility for any actions based upon this general advice