Vol 1 (2004) - Issue 4

Article preview

Administration - A Tax Driven Decision?

The Enterprise Act 2002 (‘Enterprise Act’) significantly remodelled company administrations in the United Kingdom with effect from 15 September 2003. Significant changes to UK tax legislation, made by the Finance Act 2003 (‘FA 2003’), accompanied this remodelling. The general thrust of the tax rules is to treat an administrator in a very similar fashion to a liquidator, recognizing the fact that the remodelled administration process can have a very similar practical effect to a liquidation. The purpose of this article is to explain the major consequences of the tax rules for administrators and to highlight some of the wider practical implications of those changes.

The changes made by FA 2003 (and the accompanying changes to the UK insolvency rules supporting the Enterprise Act) can be identified briefly, the changes having the greatest impact on administrators falling into three categories. First, FA 2003 makes UK corporation tax an expense of the administration. This fact alone significantly changes the priority and extent of corporation tax liabilities in company administrations and leaves the Inland Revenue in a much better position - even though the Enterprise Act abolishes Crown preference for unpaid tax. It will be seen that it may also influence the decision of a floating charge holder to appoint an administrative receiver (where that option remains available) or an administrator. Second, as FA 2003 makes UK corporation tax an expense of the administration, it also introduces rules on the commencement and termination of a company’s accounting period to identify those UK corporation tax liabilities that arise during an administration. But these rules have other practical consequences, particulary in relation to the use of tax losses. Third, FA 2003 charges an administrator with the primary responsibility for ensuring that a company in administration complies with its administrative tax obligations.

Administration versus administrative receivership

Before the FA 2003 changes to the UK tax rules applying to an administration are discussed, it is necessary to identify, at a broad level, what an administration and what an administrative receivership are.
An administration is the state of affairs that exists when an administrator is appointed to a company. Except in certain specific cases, the Insolvency Act 1986 (‘Insolvency Act’) governs most forms of administration. The Insolvency Act was extensively amended by the Enterprise Act. Before those amendments, an administrator could only be appointed pursuant to a court order on the petition of the company, its directors or a creditor. Although this option remains, an administrator may now also be appointed more informally by a company, its directors, and certain floating charge holders. At the same time, the powers of an administrator have broadened considerably, a move that appears designed to encourage the use of the simpler and more flexible administration process instead of liquidation.
One important feature of an administration in the post-Enterprise Act environment is that for the duration of the administration, the affairs of the company subject to administration are to be managed by the administrator. Insolvency proceedings, or other legal process, may not be brought against the company unless the consent of the administrator or the UK courts is obtained. As the administrator is charged with achieving the objectives of the administration, this moratorium is designed to give the administrator an unhindered opportunity to submit and carry out his proposals for accomplishing those objectives.