One of the most common questions that company directors or owners ask is whether or not they still have to pay their taxes when their company is in liquidation. Unfortunately, the answer is yes.
Even though your company may no longer be trading, the government still views it as a legal entity, and therefore you are still liable for any outstanding tax obligations. This includes taxes, such as corporation tax, VAT, and PAYE. It’s always safe to get help and advice for insolvency from experts to ensure you’re meeting your obligations.
What Is Liquidation?
In simple terms, liquidation means that your company’s assets are sold off to pay creditors. Once all debts have been settled, any remaining funds will be distributed to shareholders. If there are no shareholders, the company is dissolved and ceases to exist.
Types of Liquidation
There are three liquidation types that every director of a company should know, such as:
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation (MVL) is when the shareholders of a solvent company decide to close it down. You must fully pay all your debts before any asset distribution to shareholders. This involves appointing an insolvency practitioner (IP), such as Insolvency Online, to oversee the process.
Creditors’ Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation (CVL) is when the directors of an insolvent company appoint an IP to close the business down. The IP will try to pay off the company’s debts as much as possible using the available assets. Any remaining debts are written off, and the company is dissolved. Know and get a CVL process and advice from the experts to ensure you know your rights and obligations.
A compulsory liquidation occurs when the court appoints an IP to wind up a company after it’s been petitioned by creditors. This is the most serious liquidation type as it usually means that the company cannot pay its debts and has no way of continuing to trade.
How Does Liquidation Affect Taxes?
When your company is liquidated, you must file annual tax returns. However, you won’t have to pay any corporation tax on profits as the company is no longer trading. It’s important to note that if your company owes VAT or PAYE, these debts must be paid before any other creditors are paid out. This is because HMRC (Her Majesty’s Revenue and Customs) is a preferential creditor.
What Happens if I Don’t Pay My Taxes?
If you don’t pay the taxes owed by your company, you could be personally liable for the debt. This means that HMRC could take legal action against you to recover the money owed. In severe cases, you could even go to prison.
It’s always best to seek professional help and advice if your company is facing liquidation. An IP can help you to understand your tax obligations and ensure that you meet them.
Liquidation can be a complex and stressful process, but it’s important to remember that you’re still liable for any outstanding tax debts. Get professional help and advice from licensed and experienced practitioners to meet your obligations.