Are liquidation fees tax-deductible?

If you’re closing your company, you’re probably facing a long to-do list, some tough decisions and a few questions about how it all works. Especially when it comes to costs. One question we hear a lot is: Are liquidation fees tax-deductible? 

It’s understandable to wonder if you can claim those costs back or at least reduce your tax bill. In this article, we take a closer look at what types of liquidation fees you may incur and whether they are tax-deductible.

What are liquidation fees?

Liquidation fees are the professional costs involved in closing a business. They usually include the insolvency practitioner’s time and services, legal or accountancy advice, valuing and selling company assets, advertising the liquidation, dealing with creditors and distributing any remaining funds to shareholders.

How much it all costs depends on the size and complexity of your business and whether your company is solvent or not when it goes into liquidation.

What’s the difference between CVL and MVL?

The type of liquidation you choose also has a big impact on how the fees are treated. If your business is unable to pay its debts and you decide to close it in an orderly way, that’s a Creditors’ Voluntary Liquidation (CVL).

However, if the company is in a strong financial position and has money or assets left after settling all debts, you’d typically go through a Members’ Voluntary Liquidation (MVL). This might happen when directors retire, restructure or simply want to take their funds out in the most tax-efficient way.

Can liquidation fees be deducted?

Let’s start with CVLs. In an insolvent liquidation, fees are taken out of company assets before anything is paid to creditors. These costs are classed as a business expense, so technically, they may be considered tax deductible.  However, when a Company is placed into Liquidation, a new tax period is created and therefore, even if the Company had made profits up to the liquidation date, its profits and deductions would need to be separated from the pre liquidation return, and accounted for in its own post liquidation return.  In reality, insolvent companies also rarely have profits in the closing pre liquidation period anyway.

Therefore, whilst the liquidation fees are classed as expenses, these arent typically put on a post liquidation corporation tax return, they are just accounted for as payments from the liquidation estate receipts and the only transactions shown on the post liquidation tax return are typically just bank interest or goodwill, being the only profits to show (unless the Liquidation was a trading case, in which case the transactions would be shown as they normally would) so there is little tax benefits from liquidation fees, unfortunately.

In an MVL, the company is solvent, so the situation is a bit different. In this case, the costs of liquidation are still paid by the company, but they come out before the remaining funds are passed on to shareholders.

This means the final amount shareholders receive is smaller, and that lower amount is what’s assessed for Capital Gains Tax. If you qualify for Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief, you could pay just 14% tax on your share.

So while you can’t deduct the fees yourself, they do reduce your tax bill by lowering the figure that gets taxed.

Can directors claim the fees?

Directors can’t claim liquidation costs on their personal tax returns. The company pays the fees, and they stay on the business’s books. That said, in an MVL, directors who are also shareholders benefit from the reduced Capital Gains Tax on their distributions because the fees lower the amount that’s taxed. So while it’s not a direct deduction, it still works in favour of directors.

Looking for liquidation advice?

If you’re company is facing liquidation, the best thing you can do is get advice early. Talk to a licensed insolvency practitioner, such as Bridge Newland, to find out what the costs will be, how they’ll be handled and how they could affect your tax position both for the company and for you personally.

Our friendly expert team will guide you through the process to help you avoid any mistakes and make sure you’re choosing the most efficient route for your business and your unique circumstances.

If you would like some free, impartial advice, please get in touch with us to discuss your requirements.

Categorised in: Liquidation News