Acryl Ltd and Cresco Ltd are two unrelated companies. Acryl Ltd requires advice on the implications of being placed into liquidation, particularly the timing of distributions to its shareholders. Cresco Ltd requires advice on the relief for losses on the cessation of trade, and its obligations in relation to value added tax (VAT).
(a) Acryl Ltd:
– Is a UK resident trading company.
– Has always prepared accounts to 30 June annually.
– Has substantial distributable profits.
– 70% of the company’s share capital is owned by Mambo Ltd.
– The remaining 30% of the share capital is owned by Mambo Ltd’s managing director, Alan.
– Mambo Ltd and Alan both subscribed for their shares at par value on 1 March 2010.
Mambo Ltd:
– Is a UK resident trading company.
Alan:
– Will be an additional rate taxpayer in the tax year 2016/17.
– Will be eligible for entrepreneurs’ relief on the disposal of his shares in Acryl Ltd.
Liquidation of Acryl Ltd:
– Winding up will commence on 1 January 2017 with the appointment of a liquidator.
– It is anticipated that the winding up will be completed on 31 March 2017, when the company will cease trading.
Alternative timing of distributions being considered by Acryl Ltd:
– Acryl Ltd is prepared to distribute the available profits to its shareholders on 31 December 2016.
– Alternatively, Acryl Ltd will delay the distribution until the completion of the winding up of the company on 31 March 2017.
Required:
(i) State the corporation tax consequences arising from the commencement of Acryl Ltd’s winding up on 1 January 2017.
(ii) Explain the tax implications for both Mambo Ltd and Alan if the distribution to be made by Acryl Ltd occurs either on 31 December 2016, or alternatively on 31 March 2017, and conclude as to which date would be preferable.
(b) Cresco Ltd:
– Is a UK resident trading company.
– Commenced trading on 1 April 2012.
– Is registered for the purposes of value added tax (VAT).
– Has made significant trading losses in recent months such that the company will need to cease trading on 31 October 2016.
Cresco Ltd – trading losses:
– Recent and anticipated results are as follows:
(a) Acryl Ltd
(i) Implications of the commencement of winding up
The commencement of winding up will lead to the end of an accounting period on 31 December 2016 and the commencement of a new accounting period on 1 January 2017.
Acryl Ltd will remain liable to corporation tax until the winding up is completed. Accordingly, a corporation tax computation is required for each of the two accounting periods: the first from 1 July 2016 to 31 December 2016, and the second from 1 January 2017 to 31 March 2017.
(ii) Distribution on 31 December 2016
In this case the distribution will be made prior to the commencement of winding up and therefore will be treated as an income distribution (i.e. a normal dividend) for tax purposes for both shareholders.
Mambo Ltd will not be subject to corporation tax on this dividend as companies are not subject to corporation tax on dividends.
Alan will be subject to income tax on the dividend. It will be grossed up at the rate of 100/90 and subject to income tax at 37·5% as Alan is an additional rate taxpayer. A 10% tax credit will be available.
Tutorial note: This means that Alan will suffer an effective tax rate of 30·55% on the net dividend he receives.
Distribution on 31 March 2017
As the distribution will be made while the company is in liquidation, it will be treated as a capital receipt on disposal of the shares in Acryl Ltd for both shareholders.
Mambo Ltd should not be subject to corporation tax on the disposal as it should qualify as a disposal out of a substantial shareholding. Mambo Ltd will have held more than 10% of the shares in Acryl Ltd for more than 12 continuous months out of the 24 months preceding the disposal and both companies are trading companies.
Alan will be subject to capital gains tax on any gain arising. As Alan is eligible for entrepreneurs’ relief on the disposal of his Acryl Ltd shares, capital gains tax will be charged at 10% on the taxable gain.
Conclusion
Mambo Ltd will not be subject to corporation tax under either alternative but Alan would probably prefer 31 March 2017 as he is likely to suffer a lower rate of tax if the distribution is made on this date.
Tutorial note: It is not necessary to consider the possibility of a capital loss on receipt of the distribution on 31 March 2017. Mambo Ltd and Alan subscribed for the shares at par, so they will have a very low base cost and Acryl Ltd has substantial distributable profits.
(b) (i) Cresco Ltd – relief for trading losses
