ACCA ATX ^UK Syllabus A4. Corporation Tax - Tax treatment of returns on winding up - Notes ^{4 / 5}

Tax treatment of returns on winding up

On the liquidation of a company, the liquidator will be appointed and will distribute cash or other assets to the shareholders once the company’s creditors have been paid.

Then the shares in the company will be cancelled.

1. Shareholders are treated as receiving dividend income when the distribution is made prior to winding up commencing. 

   Tax at 0% - 39.35%

2. Shareholders are treated as disposing of their shares with proceeds equal to the amount received on liquidation if the distribution is made after winding up commences (during the period of liquidation).

   Tax at 10%-20%

Illustration

John Ltd. owns 70% of Jake Ltd.

Mr J owns the remaining 30% of Jake Ltd.

He has been the managing director of Jake Ltd. since 2010 and is an additional rate tax payer.

Jake Ltd. commenced winding up and appointed a liquidator on 01/01/25, winding up of the company will be completed on 31/03/2025.

Should Jake Ltd. distribute profits to John Ltd. and Mr J on 31/12/24 or 31/03/25?

• Solution

  For John Ltd. it will not make a difference because dividends are exempt from corporation tax.

  For Mr J, the distribution should be made on 31/03/2025 because it will be treated as a capital disposal for him and because he owns more than 5% of the shares and is an employee of the company, this disposal will qualify for E.R./Business Asset Disposal relief  at 10%.

  If the distribution is made before the winding up has commenced, it will be treated as though a dividend has been given to Mr J and he will be taxed at 39.35% as he is already an additional rate tax payer.