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Can HMRC chase a dissolved company?
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If you dissolve a company with tax debts, can HMRC chase you?
Dissolution is only suitable for solvent companies that are debt-free, so if you dissolve a company with tax debts, HMRC can chase the payment for up to six years from the date of dissolution. They can apply to reinstate the company and investigate the affairs of the company and director conduct.
When a company is dissolved it means that it closes down and is removed from the register at Companies House. The dissolution process is typically used when a business is no longer required, or a sole director is retiring.
Dissolution is an inexpensive closure option for limited companies, but it’s only suitable for those that are solvent. So if the business owed tax debts prior to being dissolved, HMRC could still chase for payment.
The dissolution process demands that all creditors are notified of the directors’ intentions to voluntarily strike off their company. This makes it very unlikely that an application would go unchallenged if tax debts were unpaid.
If an application did go through, however, and the company was dissolved even though it owed money to HMRC, the tax body could apply to have it reinstated to the register. So how are companies reinstated in this way, and what are the implications for company directors?
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HMRC can chase a dissolved company for up to six years from the date of dissolution, but if they believe fraud has taken place or that the directors have been negligent in some way, they can chase for up to 20 years.
Their initial action would be to apply for the company’s reinstatement. This is done through the courts, and if successful, the company name is restored to the Companies House register. The business is then treated as though dissolution hasn’t taken place.
Following restoration, HMRC would launch a full investigation into the company’s affairs as well as the conduct of directors. It’s a serious matter to close down a company that has debts outstanding, and the consequences for company directors can be severe.
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HMRC carries out stringent investigations to recover their tax losses, especially if they believe directors have deliberately attempted to evade payment by dissolving their company.
So what might an HMRC investigation uncover when chasing a company that has been dissolved? These are just a few of the potential issues that could be found:
- Preferential payments – directors may have repaid other creditors, but not HMRC
- Breach of director fiduciary duty, also known as misfeasance – a director may have acted in their own interests rather than those of the company’s creditors
- Fraudulent activity – for example, knowingly increasing the financial losses of creditors prior to dissolving the company
This situation also leaves company directors at serious personal risk of sanctions and financial penalties.
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Under normal circumstances company directors are protected by the ‘veil of incorporation’ – incorporation is the business structure that makes the company a separate legal entity from its directors.
If HMRC believes that wrongful or fraudulent activities have taken place, however, company directors will be open to personal liability for some or all of the outstanding tax debts. HMRC are also likely to apply interest charges and penalties to the debt, from the date of dissolution.
The tax body can chase directors through the courts for payment on a personal basis, placing their home and other assets under significant threat. The risk of trying to dissolve a company when it owes money to HMRC is considerable, and there is a better way to proceed.
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Company dissolution is an inexpensive closure option, but it’s only appropriate in certain circumstances – namely, when no debts are owed. Creditors’ Voluntary Liquidation, or CVL, is the process to follow if the company’s debts cannot be repaid.
Directors may be able to claim statutory redundancy pay using this route, which could cover the professional fees involved, and ensure they minimise the chances of misconduct allegations.
Real Business Rescue can provide further advice on company dissolution and reinstatement. We offer free, same‐day consultations, so please get in touch with our partner‐led team – we operate a broad network of offices around the country.
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