My question is simple - will you help defeat this pernicious proposal the second time round? You will remember that previously HMRC suggested that in legislating ESC C16, which allows distributable reserves of companies being struck off to be extracted in capital form with HMRC permission, a limit of £4,000 would be imposed and an amount extracted above this level would count as a distribution and thus incur an income tax liability for any higher rate taxpayer. I have shown below the text of the objection I have sent to HMRC today and which will form the substance of protest to MPs, if only they will listen. We defeated the income sharing proposals by mass protest previously
Today's proposal is to increase the limit to £25,000 and to apply it to all distributions after 1 March 2012. Now read on...
ESC C16 Proposals
Although the proposed increase in the C16 limit seems a more reasonable figure to counter 'tax avoidance' it still means that for many small businesses with only modest sums available significant additional costs will be incurred by treating the excess above £25,000 as a mandatory distribution unless the taxpayer incurs the additional expense of a liquidation which is estimated to cost £7,500 in a typical straightforward case.
A Taxpayer who has built up a small company on retirement, where £1,000 was injected as original share capital will now face additional tax costs as a result of this proposal and at a business value of £76,000 will have an additional tax bill of £7,500 and so will begin at this level to be better off by enforced liquidation - always assuming that one can be arranged at the quoted figure.
The justification for this is prevention of avoidance but it does nothing of the kind. Businesses with distributable reserves in excess of £75,000 will simply appoint a liquidator and will suffer the additional cost but still pay CGT on the whole of the distribution. How can this then be regarded as "avoidance" or the proposal act to limit avoidance? It simply adds extra costs to the smallest of businesses and increases the cost for slightly larger businesses who will now benefit from the CGT treatment to a lesser extent because of the liquidation costs.
It is clearly not limiting avoidance as the impact assessment admits that over the next five years: "This measure is expected to have a negligible impact on receipts"!
The only beneficiaries of this misguided proposal are liquidators who must be rubbing their hands with glee over the additional fees that will now flow their way.
If HMRC seriously believe that there may be situations where ESC C16 is being used for avoidance purposes then surely the answer is NOT to burden these small businesses with needless additional costs but to include a Targeted Anti Avoidance Rule so that where a taxpayer uses this method of extraction and the object, or one of the objects is the avoidance of liability to income tax, for example by transferring the business to a new entity, whilst having the old entity struck off so that distributable profits may be extracted in capital rather than income form, then HMRC will have the ability to raise discovery assessments to recoup the tax lost.
Incidentally even in the above example, where C16 is clearly used for avoidance purposes, there is an existing anti-avoidance measure which could be brought to bear - the Transactions in Securities Rules, which were themselves amended in 2010 to focus upon Close Companies and avoidance of this type.
If it is still felt that some reasonable limit be applied to the operation of the proposals this should be set at a much higher figure than £25,000 so that the smallest of businesses do not have to suffer this additional cost burden needlessly. If the additional tax cost in a striking off is added to the CGT rate of entrepreneurs' relief it indicates that a taxpayer rapidly loses the advantage of entrepreneurs' relief and at a gain of only £51,000 will be paying an effective rate of 18%, and at a gain of £75,000 where the additional tax cost equates with the cost of liquidation will be suffering an effective rate of 20%.
Given that the benefit of entrepreneurs' relief is suppose to extend to gains of up to £10,000,000 this action, in depriving the very smallest of these businesses from the benefit of this relief is surely contrary to government policy if it is assumed that the gains are not avoidance motivated. If the gains are avoidance motivated surely the sums involved would be expected to be much, much larger than the trifling sums which will be collected from these smallest of businesses and new or existing anti-avoidance measures would be a more appropriate use of revenue resources, given that under these proposals larger transactions where significant avoidance may well be occurring would simply follow the liquidation route and so avoid tax at a fixed cost of £7,500!
I am starting up a government e-petition as well and will notify everyone when it goes live.
Paul Soper FCCA