Corporation tax and liquidations – what tax rate?
In light of the new corporation tax rates from April 2023, we consider the potential impact of this on companies in liquidation.
The start of liquidation proceedings can have several implications from a corporation tax perspective.
End of a corporation tax accounting period
When a company enters liquidation, this is the start of a new corporation tax accounting period per Section 12 CTA 2009. Whilst this will have an impact on the ‘normal’ corporation tax payment date, for solvent liquidations, HMRC can seek statutory interest (up to 15%) on the corporation tax liability for accounting periods before the start of liquidation.
In these circumstances it is desirable for the company to make a payment of the best estimate of the corporation tax liability before liquidation commences.
Corporation Tax rates
The applicable corporation tax rates for a company in liquidation are outlined in Section 628 CTA 2010. This section covers the corporation tax rate to be used for the final year and penultimate year before the company is dissolved.
Final year: Where the main corporation tax rate has been set for the final year, that is the rate to be applied. But if a main corporation tax rate is not set but has been proposed, such as in a fiscal statement, the proposed rate is to be used. If a rate has neither been set nor proposed, the rate set or proposed for the penultimate year should be used.
Penultimate year: Where the company is in liquidation before its final year and the rate for the penultimate year has not been set, the main corporation tax rate proposed for the penultimate year is to be used for taxing profits arising at any time in that year.
Section 627 CTA 2010 explains the definitions of ‘main corporation tax rate’ for this purpose. Where a company is paying tax at the main ring fence profits rate, the standard small profits rate, the small ring profits rate, or has its tax liability reduced by marginal relief or ring-fence marginal relief, Section 627 explains that any references in Section 628 to main rate should be taken as relating to profits charged at any of the above rates.
The new corporation tax rates from April 2023 could see Sections 627 and 628 CTA 2010 being more relevant, particularly if there is a change in rates in future years.
Impact of liquidation on trading companies
A company being subject to liquidation proceedings may have an impact on the rate of corporation tax being paid. This is because of the criteria for the 19% standard small profits rate and marginal relief.
Regardless of the level of profits, to qualify for both the 19% standard small profits rate and marginal relief it is necessary under Sections 18A and 18B CTA 2010 respectively for the company to be resident in the UK and not be a close investment-holding company in the period.
Section 18N CTA 2010 explains that a close investment-holding company is any close company (as defined in Section 439 CTA 2010) unless it exists wholly or mainly for one or more of the stated permitted purposes. The main permitted purposes noted are carrying on a trade or trades on a commercial basis and land let to an unconnected party.
HMRC’s company taxation manual CTM60780, covers a special rule for liquidation as outlined in Section 18N(5) CTA 2010. This means that where a close company enters liquidation, it will not be treated as a close investment-holding company in the first accounting period of liquidation if it was not one in the previous accounting period.
For subsequent years in the liquidation, the normal rules will apply as per HMRC’s manual CTM60710. As in most cases, it is likely that any trade or property rental will have ceased by the second year of a liquidation. This may mean that the company will become a close investment-holding company when it has not been previously. This change in status would need to be noted as such on the corporation tax software, details of how to do that will vary between tax software packages.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.