Do you have a company you no longer need?

Many businesses operate via a company and then are unsure what to do with it once the business is sold or ceases to trade. 

Often companies are kept just in case they can be used again at a later date.  These days it is so quick and easy to form a new company. Keeping old ones for this reason is almost redundant.

A company is a separate legal entity and as such it continues to exist until it is removed from the Companies Register.  Unless the Inland Revenue Department (IRD) has been notified that the company is non-active, the company will be required to file an income tax return each year, until it is removed from the Companies Register.

Having a company that is no longer required incurs costs.  Firstly there is the Companies Office annual return fee, then there are the costs associated with filing an income tax return, even if it is a nil return.

So if you no longer need your company because it has ceased to trade, what options do you have?

Amalgamation

If you have other companies that are still trading, you may want to consider an amalgamation.  Under an amalgamation, the assets and liabilities of one or more companies (amalgamating companies) are “transferred” to either a new company or an existing one that will carry on trading (amalgamated company).  Amalgamations can be advantageous when there are losses in the non-trading company as subject to certain conditions being satisfied these may be able to be transferred to the amalgamated company.  Once the amalgamation is complete, the amalgamating companies cease to exist.

Strike Off

If you fail to file the Companies Office annual return, the Registrar of Companies will commence proceedings to have the company removed from the Register.  Where the company still has any assets, these assets will transfer to the Crown on removal from the Companies Register.  Under this option, if the company has any capital gains, they will not be able to be distributed tax free to the shareholders (unless the company is a qualifying company).  Where a company is struck off, it is relatively simple to have the company restored to the Register, should a creditor wish to take action against the company.

Request Removal

Once the company has ceased to trade and has settled all its liabilities and distributed all its assets, the shareholders can resolve to have the company removed from the Companies Register.  To do this, the company must first obtain approval from the IRD, then make an application to the Companies Office to have the company removed from the Register.  The Companies Office will undertake all the necessary advertising to ensure that there are no creditors which might object to the company being removed.

Liquidation

A liquidation is often the most costly method for having a company removed from the Companies Register.  A liquidator must be appointed and it is their responsibility to dispose of all the company’s assets and pay any outstanding liabilities.  Once this is done, the liquidator will apply to the Companies Office to have the company removed from the Companies Register on the grounds that the company has ceased to trade and all known creditors have been paid.

Each of the four options listed above has its own advantages and disadvantages.  Getting rid of a company that is no longer trading will usually save money in the long run.

What is a building?

What is a building?  This seems like such a simple question and yet apparently the answer is not so straight forward.

The Inland Revenue Department has recently issued a Draft Interpretation Statement setting out what they believe the term “building” means. 

For many of us, a building is a house, office block or factory.  The term “building” would suggest a permanent fixture, typically with four walls and a roof that can function independently of any other structure.   These terms have also been confirmed in many legal cases over the years. 

The definition of a “building” for the purposes of the depreciation rules is important in determining what depreciation rates can be claimed and whether any loss on disposal is deductible.

Buildings are generally depreciated at 3% on a diminishing value basis or 2% on a straight line basis.  There is no 20% uplift for new buildings.  When a building is sold or disposed of unless the building has been acquired or revenue account at a loss, the loss can’t be claimed for tax purposes.

The Draft Interpretation Statement indicates that the Inland Revenue Department proposed view is broader than previously documented.  The structures listed below all fall within the proposed definition of a building.

·        Buildings with steel and or timber framing

·        Buildings with reinforced concrete framing

·        Buildings with prefabricated stressed-skin insulation panels

·        Carpark buildings (not carparking pads)

·        Fowl Houses / Pighouses / Barns

·        Grandstands

·        Hothouses / Shade houses

·        Tanneries

·        Dairy Sheds / Barns

The following structures would not fit within the definition of a building under the Inland Revenue Department’s proposed definition:

·        Concrete Bunkers

·        Silos

·        Site Huts

·        Portable Buildings

Where a structure now falls within the definition of a building, the owner will not be able to claim a loss on disposal.  When you purchase a structure that falls within the definition of a building, the depreciation rate is likely to be lower, and no 20% uplift is available.

The Government has indicated that it will introduce new legislation to ensure that the current tax treatment continues to apply for the current owners of the structures, so that they are not disadvantaged by the change in interpretation.  The new definition will only apply once the structure changes hands.