An international firm of accountants has announced that Companies House has c.681,000 registered companies that are classed as ‘dormant’ and, at an average cost of maintaining each put at c.£900 per annum, this was costing British businesses c. £680m every year. They advocate winding these up to reduce costs and the risk of legal claims arising from past activities.
Why are they there?
There are many reasons why seemingly dormant companies are retained.
Often it is as simple as the desire of the owner(s) to protect a name associated with another business.
Perhaps the company may become entitled to, say, an earn out in relation to a business with which it was formerly involved. Such contractual arrangements are not reflected in the accounts until the pay-out is certain. It is not always possible to assign such rights elsewhere and there may be tax disadvantages in doing so.
What could be lost?
Not everything a so-called dormant company might own is obvious from its accounts.
Trade marks may have been written down or never recorded at all (if the costs of registering were borne elsewhere in the group). Freeholds, reduced in value to a negligible amount because a long lease has been granted over the land at a premium, may have been forgotten. Provisions against debts due to the company may have been made but the debt might still exist, unless formally waived, and it might become good again. This is particularly common with intra group balances.
When a company is liquidated or struck off, any assets overlooked and not distributed to the shareholder(s) belong ‘bona vacantia’ to the Crown.
And the tax angle?
Just because a company has a low issued share capital (say £1) does not mean that that is its worth or its tax base cost for capital gains purposes. The shareholder(s) must take care they are not inadvertently triggering a tax liability or overlooking a tax loss as a result of the winding up. When a company ceases activities, tax losses carried forward may cease to be available – but not in all cases.
Anti-avoidance legislation exists to prevent the use of losses through sales to third parties or artificially diverting profits. But there may be opportunities.
So, look before you liquidate (or strike off).