Termination payments

Legend100

Hello all,

Looking through the 1997 Acts and can't find an answer to this question. If a close company is about to go into liquidation (liquidator not yet appointed), can the directors receive the tax free termination payment (basic, increased basic or SCSB) prior to the liquidation?

For some reason I thought the company had to be a continuing business when termination payments were being made but I think im confusing corporation tax legislation for the allowability of the payment with income tax legislation and the allowance to receive the sums tax free.

IT21 seems unclear re liquidations

Any info would be appreciated

johnc2212

s123 & s 201 of the TCA 1997 deals with termination payments and don't mention the scenario you mention. However, the case you present is not just a tax question, there are legal questions that require answering i.e. what type of liquidation, which in turn will impact on your directors' position.

Mr. Incognito

No.

There is a cast iron hierarchy of creditors when a company is wound up.

Revenue.
Court Fees if applicable.
Creditors.
Preferential Shareholders.
Ordinary Shareholders.
Then staff of all ranks.

This is a company law question and not a tax one. The reason it is not mentioned in the tax legislation is because it is in the the Companies Act 1963 and has nothing to do with tax.

johnc2212

I believe shareholders are last in the order

BZBee

Who would be awarding the payment?

Corrs LIGHT

'reckless trading'?

dbran

Hi

As previously mentioned this is a company law question rather then a tax question.

Paying a director a termination payment on redundancy would very likely be viewed as a preferential payment of creditors. In the same way that even clearing an overdraft that is personally guaranteed by the director would be treated as preferential payment of creditors.

I believe the liquidator can subsequently persue the director for repayment of the termination payment.

It depends of it is a solvent or an insolvent liquidation

Kind Regards


dbran

censuspro

Legend100 wrote: »

Hello all,

Looking through the 1997 Acts and can't find an answer to this question. If a close company is about to go into liquidation (liquidator not yet appointed), can the directors receive the tax free termination payment (basic, increased basic or SCSB) prior to the liquidation?

For some reason I thought the company had to be a continuing business when termination payments were being made but I think im confusing corporation tax legislation for the allowability of the payment with income tax legislation and the allowance to receive the sums tax free.

IT21 seems unclear re liquidations

Any info would be appreciated

From a taxation perspective, the directors are allowed to received the termination payments that you mentioned. However, the company may not be entitled to a deduction for the payments.

CheltenhamJ

I agree with most of the above , it is very much in the realms of a potential reckless trading situation and a company law issue. The questions of deductibility depends on whether the business is continuing or not and the Southport Printers case should be referred to in this regard.

johnc2212

Hi do you have a source for the Southport Printers case?