Redundancy and Exit Strategies: A Tax Perspective

COVID-19 has caused economic chaos and as we look to 2021, the closure of many businesses and subsequent redundancies loom. One such case was discussed in the London and Croydon Tax Discussion Group and the tax implications are detailed in this article.

December 2020

Each month, the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending. During the current Corona virus lockdown restriction, the Tax Discussion Groups have moved online, but are still meeting monthly.

One such query discussed this month is set out in more detail below.

The accountant explained that his client had decided to “wrap up their business” in the new year. He explained that the Company had over £200,000 in net assets, and as his clients were over retirement age, they had little need to run the business anymore. The current Coronavirus lockdown had meant that they reached the decision to close the Company, and they had recently sold their Company. 

His clients had asked whether they would be able to claim redundancy upon closing the business, and if they could do so, then could they claim the full tax-free termination payment amount of £30,000 each?

They were also keen to confirm the amount of tax payable upon the Company’s dissolution and whether there were any arrangements which could maximise the monies they would get from the Company.

The discussions initially concerned the requirement for the Company to use a liquidator as the capital and reserves exceed £25,000. Whilst the Company could be wound up by using the informal dissolution process via form DS01, doing so would mean that the monies being distributed would be an income distribution. 

Subsequently, we discussed whether the Company could make its Director and shareholders redundant. The Accountant confirmed that whilst they had been running the business for many years, the amount of remuneration received by the Directors had been only £7000 pa each per year recently. Some of those attending felt that the Company could make the Directors redundant and pay them the statutory redundancy due, whereas others felt that this was an aggressive stance to take in the circumstances.

The main issue, that concerned those who counselled not to claim the statutory redundancy, was the decision to wind up the Company was not due to the cessation of the Company’s business due to the lock down; but because the clients had decided to retire.

Moreover, as Company decisions are taken by the Directors and hence the Company could not undergo an independent redundancy process as required under Company Law.

It was felt far preferable to liquidate the Company, claiming Business Asset Disposal Relief [formerly Entrepreneur’s Relief] if available on a capital distribution.