COM130050 - Returns / notices: notices and returns: mandatory online filing and the end of a company’s life
This subject is presented as follows.
Background - Company striking off
Why the end of company life creates problems with the filing requirement
Mandatory online filing and insolvent company exemptions
Solvent companies - informal dissolution and members’ voluntary liquidation
The basic proposition for solvent companies
Agreeing figures before the filing date to allow striking-off or liquidation
Where the return for the last normal accounting period will be due before the likely striking off date
Claims under Rule 14.44
Dealing with outstanding earlier periods
Background - Company striking off
The vast majority of companies are struck off without any formal legal process of liquidation or prior state of administration. They just cease activity, distribute their assets to creditors and share-holders and either ask to be struck off or are struck off by Companies House because they do not send in their annual Companies Act returns or fail to meet other administrative requirements.
The rest are struck off following a formal winding up process. The majority are insolvent liquidations, where the creditors of the company have it liquidated or the directors put the company into a voluntary insolvency arrangement. The balance are solvent companies liquidated under a members’ voluntary liquidation (MVL).
When a company goes into a formal winding up process, the company’s affairs are placed in the hands of an insolvency practitioner (IP), that is a liquidator, administrator or administrative receiver. That person becomes the proper officer of the company and, in the case of a liquidator, the only person through whom the company can act for any purpose under the Taxes Acts (S108(1) TMA 70).
Why the end of company life creates problems with the filing requirement
A company must deliver a company tax return to HMRC if it receives a notice to do so under Para 3 Sch 18 FA 98.
The notice is contained in form CT603, issued automatically by COTAX to every ‘live’ company. It is this notice which defines the required content of a company tax return.
In particular, the notice requires the return to include ‘a copy of the accounts of the company for the period covered by the return’ and ‘computations showing how the specified information (that is, the entries on the CT600 return form) has been calculated from the relevant figures in the accounts’.
‘Accounts’ is defined at length in the notice. For a normal UK resident company, it means the company’s ‘individual accounts’ which it is required to prepare under S394 of Companies Act 2006.
However, meeting the accounts requirements of the Para 3 notice is a practical impossibility in most formal windings-up, as discussed below. Even in informal company closures, there is often little incentive for the company to incur the costs of preparing full accounts so it will often be virtually impossible to secure compliance.
At the point when a company decides to cease its activities and seek striking off, or when it enters a formal winding up process, it may or may not have prepared those accounts up to its last normal accounting date, and it may or may not then have had any necessary audit carried out if they have been prepared. In practice, it will often have done neither.
Whilst full accounts are preferable it is not always possible for an IP to provide them. Therefore we should take a pragmatic approach to accepting submissions from IPs, with the caveat that if there are any concerns to refer it to either a CTC or HO(T) for a final decision
Example: informal striking off
Last Legs Ltd’s normal accounting date is 31 December.
- It ceases activity on 31 March 2011 and decides to seek striking off without the formality and cost of liquidation, and to distribute any assets under the provisions of Chapter 3 of Part 23 of CTA 2010 that a distribution made by a company prior to its dissolution is not treated as a distribution for the purposes of the Corporation Taxes Acts. It has not prepared accounts to 31 December 2010 or 31 March 2011 when it decides to seek striking off.
Once the decision has been taken to cease activities and seek dissolution of a company, the priority is generally to minimise costs and protect the remaining assets of the company to give maximum benefit to the shareholders and others with an interest in the company.
Companies House does not routinely enforce the requirement to prepare the accounts required under the Companies Act once a company enters a formal winding up process or when it seeks striking off, even though that statutory requirement remains. Equally, Companies House normally allows the company to be struck off without first delivering copies of outstanding accounts for the public record. So there is little incentive to prepare these accounts.
In any case, the company will certainly not have prepared Companies Act individual accounts for the period following the last normal accounting date, up to the date of striking off or the commencement of liquidation. Neither will such accounts be prepared for the period of liquidation, where relevant.
In the case of a formal liquidation or period of administration or receivership, when the formal process begins, the IP takes on the responsibility for doing everything that the company is required to do for tax purposes. However, the IP’s actions are very constrained by the Insolvency Act, which regulates their activities.
The IP will not normally prepare any missing company individual accounts for the period prior to their appointment and the directors of the company no longer have the power to do so. In an insolvent liquidation, there will in any case often not be the resources in the company to do so.
Example: formal winding up
Sinking Fast Ltd’s normal accounting date is 31 December.
- It goes into liquidation on 1 May 2011.
- It is struck off on 15 March 2012.
- When liquidation commences, it has not finalised its accounts for the periods to 31 December 2010 or 30 April 2011 (date immediately before winding up starts).
- The liquidator will not prepare accounts for those periods or for the accounting period within the period of liquidation, to 15 March 2012.
It follows that a full company tax return, meeting the requirements of the Para 3 notice, becomes a practical impossibility in most formal windings-up.
That is not a result of mandatory online filing - it was equally true in the past, when company tax returns were required on paper. For that reason, CTM93100 sanctions the acceptance of an ‘informal return’.
Mandatory online filing and insolvent company exemptions
From 1 April 2011, nearly all company tax returns for periods ending after 31 March 2010 have had to be delivered to HMRC over the internet. There is a legal exemption for insolvent companies.
Companies do not have to deliver their company tax returns online if they are subject to a winding up order or are in formal administration or administrative receivership. This legal exemption also extends to creditors’ voluntary liquidations, company voluntary arrangements and provisional arrangements under a court order. The full details are set out in Regulation 3(10)&(10A) of the Income and Corporation Taxes (Electronic Communications) Regulations 2003, inserted by statutory instruments made in December 2009 and December 2010. You can find the various statutory instruments on the HMRC website.
Once any of these forms of legal process is in effect, the company can choose whether to deliver its return online or on paper. In practice, the liquidation signal on COTAX automatically unenrols the company from the Government Gateway and the IP has to re-enrol if required.
This exemption applies in relation to any return, for any period, while the company is subject to the formal insolvent winding up procedure. So it applies to any outstanding company tax returns for periods before the commencement of the winding up and appointment of the IP as well as to periods within the period of the winding up procedure.
This legal exemption of insolvent companies from mandatory online filing means that we can and will continue the practice of accepting an ‘informal return’ from liquidators, for any period, as set out at CTM93100.
Example:
Belly Up Ltd is insolvent and has not prepared formal Companies Act individual accounts or delivered outstanding company tax returns for periods:
- before the commencement of the winding up, or
- within the period of the winding up procedure.
HMRC will accept formal returns online or on paper, or informal returns on paper for any of those periods.
Solvent companies - informal dissolution and members’ voluntary liquidation
The exemption does not apply to solvent dissolutions where the company seeks informal striking-off or enters a members’ voluntary liquidation (MVL). There is no policy reason for any of these solvent companies in the process of cessation to be exempted from online filing. There may be particular risks as a result of the cessation and striking off which need consideration, so a full company tax return may be essential.
So our starting point has to be that the normal filing requirements for a solvent company apply to the return for any period for which we issue a notice, even in an MVL where an IP has been appointed. By law, we require a full company tax return online in accordance with the requirements of the notice for that period.
However, these cases present practical difficulties which the following guidance addresses.
The basic proposition for solvent companies
An accounting period of the company ends when it ceases to trade or ceases to be within the charge to corporation tax. In the case of an MVL, an accounting period also ends immediately before the winding up starts. So there will nearly always be a final accounting period, running from the day after the end of the last normal accounting period and ending with the last day of trading or the day before the commencement of the liquidation. This is referred to below as the ‘stub period’.
Typically, you will become aware of the cessation and intention to seek striking off at a point when the notice for the last normal accounting period has been issued. In such cases, in principle the company must comply with the requirements of the notice and deliver a full company tax return for that period, including the Companies Act individual accounts and tax computations both tagged in iXBRL.
Example:
Ready2Retire Ltd is solvent and the husband and wife directors want to close down the business and settle in Spain.
- The company’s normal accounting date is 31 December.
- The CT603 notice to deliver a return for accounting period ending 31 December 2010 is issued in January 2011.
- The company ceases activity on 1 April 2011 and it notifies HMRC that it intends to seek voluntary striking off.
- The issued notice requires the company to deliver a full company tax return for the last normal accounting period to 31 December 2010, including Companies Act individual accounts and tax computations both tagged in iXBRL, online.
In such cases you should insist on a full online company tax return for any accounting period for which the return will be due before the date of striking off.
Agreeing figures before the filing date to allow striking-off or liquidation
However, you will often be asked to agree to the striking off of a company before the statutory filing date for the return for the last normal accounting period - that is, at a time when that return is still not legally due. You will also need to agree the position for the ‘stub’ period following the last normal accounting period up to the proposed date of striking off or commencement of liquidation. Obviously, no notice will have been issued requiring a return for that period.
In such cases, you should only insist on a full online company tax return - and object to the striking off until you receive it - where you have reasonable grounds for considering that there is a risk of tax loss if you do not have the opportunity to review a full company tax return.
Where you do not think there is a material risk of loss of tax, you can agree the tax liability of the company for the last outstanding accounting period, as well as for the ‘stub’ period, on the basis of management accounts or similar financial statements and tax calculations based on them.
Note: What you accept in this way as a basis for settling the tax affairs of the company in order to permit striking off is not a company tax return. So you cannot enquire into it.
Neither is the online return filing service designed for such cases. In practice, if a company does file such documentation using the online filing service and the relevant liability details process successfully into COTAX, you can allow the postings to stand but remember that strictly no company tax return has been filed.
You can accept the relevant information on paper or by e-mail provided it meets your needs. If you are satisfied that the financial statements and calculations of tax you receive provide a satisfactory basis for establishing the tax position for the period, you can process them into COTAX as ‘informal returns’, following the guidance at COM130100, COM130101 and COM132040.
Example:
Frugal Ltd wants to wind up as quickly and cheaply as possible.
- The company’s normal accounting date is 31 December.
- It approaches HMRC in May 2012 asking whether we will agree to the company being struck off on 30 September 2012.
At that point:
- the company’s return for its last normal accounting period to 31 December 2011 is not yet due (notice issued January 2012, statutory filing date 31 December 2012)
- there will be a ‘stub’ period from 1 January 2012 to 30 September 2012 for which no CT603 notice to deliver a return has been issued.
HMRC:
- reviews the request and is satisfied that there is no material risk of tax loss requiring sight of full company tax returns
- agrees to settle the tax liability of the company for the last outstanding accounting period, as well as for the ‘stub’ period, on the basis of tax calculations based on management accounts, which the company provides on paper by post
- processes the relevant tax figures into COTAX as ‘informal returns’.
If in practice the striking off is delayed and does not take effect until after the filing date for the last normal accounting period, you should only object to the striking off and require a company tax return if there are material tax risks.
Where the return for the last normal accounting period will be due before the likely striking off date
In principle, the company must comply with the requirements of the notice and deliver a full online company tax return for that period, including the Companies Act individual accounts and tax computations both tagged in iXBRL. If it fails to do so, it incurs the normal penalties for non-filing.
You should maintain that line in relation to informal striking off cases.
However, there are particular considerations in relation to MVLs.
Once the liquidation commences, liquidators are under no statutory requirement to prepare full Companies Act accounts for these periods.
The Companies Act does not remove the obligation on the company to prepare company individual accounts under S394, but in practice that requirement is not enforced. For tax purposes, the IP becomes the proper officer of the company and the only person through whom the company can act under the Taxes Acts.
So if the statutory accounts have not been prepared before commencement of the liquidation, the IP is unable to comply in full with the notice as they will not be able to deliver the accounts element of the return. It follows that the computations required by the Para 3 notice cannot be produced either, as the starting point for them would be a set of accounts which does not exist. Consequently, neither of the two elements of the return which are normally required to be delivered in iXBRL format will be available.
That does not remove the obligation to file online. However, Regulation 3(8) requires HMRC to accept that the filing requirement has been complied with if contraventions or failures to comply with the required form do not undermine the purpose of universal online filing and are necessary in order to deliver the return by the filing date.
So where it is impossible for an IP to deliver normal accounts and computations, HMRC can accept something which falls short of that requirement of the notice.
- The IP must deliver an online return.
- If they do not have appropriate commercial software, they should normally be able to use the free HMRC product available on our website.
- They need to complete the relevant boxes of the CT600 return form element. But instead of using the accounts and computations templates in the product, they should tick the box saying there are no accounts and computations attached, and instead attach one or more PDF documents providing the relevant draft accounts or financial reports and a calculation of any corporation tax payable, showing the derivation of the self assessment in the CT600 from the financial statements provided.
There may be some cases where the structure of the CT600 element of the HMRC product is not well tailored to the specific needs of a case. You should be prepared to be flexible about that, provided the tax payable is correct.
Such a return will process through the online filing service and into COTAX. It is a satisfactory company tax return and can be enquired into. It will appear on the ‘E-Filed Returns List’ (EFRL) because of the PDF attachment.
You should accept it as discharging the filing obligation, subject to risk assessment of the tax charge and enquiry if appropriate.
Claims Under Rule 14.44 {#}
An Insolvency Practitioner (IP) or such like has established the liability for the final period of a MVL winding up. The IP has paid the final liability or is in a position to do so. Where the due date for that payment has not yet been reached then this is known as a “proved and admitted future debt”.
The amount of the “admitted debt”, if paid early, is reduced (discounted), currently at a rate of 5% per annum, for the period beginning with the date upon which the MVL commenced and ending with the date upon which payment of the debt is paid.
The relevant legislation is Rule 14.44 of the Insolvency (England & Wales) Rules 2016. A similar Rule applies in Scotland.
All Rule 14.44 claims and calculations together with calculations of any Statutory Interest due are handled by EIS, MVL Team, Newcastle.
You should refer any claims to this team via E-form.
Dealing with outstanding earlier periods
The requirement to file online should be met wherever we are accepting what is delivered as a company tax return.
We should expect full online iXBRL-tagged company tax returns in relation to normal accounting periods for which the filing date has passed.
So if there are accounting periods for which the company tax return is outstanding and the filing date has passed at the time that the striking off is proposed or the MVL commences, there are no grounds for accepting anything less than a full online company tax return as discharging the filing obligation.
In the case of an MVL, the IP will not normally be able to supply a full company tax return for such a period and the situation is essentially beyond their control.
- You should still make the appropriate tax determinations for such periods and allow COTAX to apply the relevant penalties for non-filing.
- These should be paid by the liquidator as debts to be discharged during the liquidation.
It is in the best interests of all parties for the IP to ensure that HMRC has the best available information on which to base such determinations, and that the tax is paid on time to avoid the possibility of tax-related penalties.
- You should normally expect the IP to be able to provide you with detailed management accounts and a tax computation based on those accounts.
- You should review this information critically and apply normal risk assessment considerations to it. If you are satisfied, then you should make the determination in accordance with the computations supplied by the IP. If you are not satisfied, you are entitled to make a determination to the best of your information and belief.
This information is not a company tax return, so it should not be delivered online and the online filing service has not been built to allow its delivery.
Note: In all cases, you should deal with any application to exercise the provisions of Chapter 3 of Part 23 of CTA 2010 that a distribution made by a company prior to its dissolution is not treated as a distribution for the purposes of the Corporation Taxes Acts in accordance with the information contained in the Company Taxation Manual at CTM36220 onwards.
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