ESC C16

ESC C16

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ESC C16 allows distributions on winding up of companies to be treated as capital gains (not income) if the Revenue are given certain undertakings . Up until now I have always had the undertakings signed by a sole director on behalf of everyone (and I know of cases where undertakings signed by the accountant on behalf of everyone have been accepted.)

I now have one inspector at one tax office insisting that the undertakings should be signed by a director PLUS the company secretary PLUS all the individual shareholders. Before writing back (again) to this sad jobsworth I though I would ask if anyone else has ever heard of such a 'requirement'.

Needless to say there is no guidance in either the ESC or in the manuals.........

Ian McKechnie

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By AnonymousUser
01st Aug 2008 17:11

Why the tone
I don't know why you should complain about the Inspector. I have seen more Inspectors asking for a signed undertaking from the shareholders and the company and now, as a matter of routine, I have the letter signed by a director and the shareholders. I've not seen asking for a director and a company secretary but that should surely only be needed anyway where a company is a shareholder so that they treat the distribution as a chargeable gain rather than FII.

As to saying that HMRC routinely object to the striking off when there is an amount owed, HMRC should not expect to have to rely on their objection to be able to cover the tax.

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By Chris Smail
01st Aug 2008 11:35

PI?
I do not think I would like to be in the situation where HMRC are pursuing an investigation and a shareholder denied accepting the liability.

I agree it would be theoretically possible for the members and the board separately to pass unanimous resolutions to this effect and then for the Co Sec or accountant to inform the revenue so, but you may as well get them all to sign an ESC C16 agreement as to sign the resolution so where is the gain?

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By AnonymousUser
01st Aug 2008 11:08

HMRC explanation
I have recalled my file from storage to check the reason given by HMRC for the change of practice. From my notes the reason given was

"some (unnamed) accountants have been using the ESC C16 procedure as part of a tax avoidance scheme and because the shareholders had not signed the assurances, HMRC had no comeback against those shareholders."

So there we have it.

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By kenmoody
01st Aug 2008 10:46

Even so ...
... if, as suggested, there is a tightening up of policy - and we have heard of inspectors asking for additional assurances such as the shareholders are not planning on setting up another company - what can you do about it? If you want the benefit of the concession isn't the path of least resistance to just get the thing signed by the shareholders. I'd agree that it's quite unnecessary for the reasons given - just not sure I could be bothered arguing given that concessions are just and their application is within HMRC's gift unless you want to go for judicial review.

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By ianmckechnie
01st Aug 2008 10:16

No guidance?? No guidance!!
Euan - thanks for the comment, but I think you should read what CTM36220 actually says (and more importantly, consider what it doesn't say).

it doesn't say that the assurances need to be given by anyone in particular, and specifically it doesn't say that they have to be in writing.

Accountants give 'assurances' to HMRC all the time about all sorts of matters, so what is so special about ESC C16?

All the Revenue needs under ESC C16 is an assurance that the shareholders agree to do something - and, purely as a hypothetical, if the shareholders agree (even verbally) to do something, and then don't, they lose the benefit of the concession, and end up with an expensive income distribution.

Of course, getting the shareholders to agree that they will PAY any CT liability arising might best be done in writing (best for HMRC, that is), but given that Inspectors (in my experience) object to any striking off where any tax liabilities remain unpaid, the question seems a bit academic.

All you are doing by getting shareholders to sign an undertaking is to give them a personal liability for a company tax bill in the very,very unlikely event that an enquiry after the striking off of the company discloses an additional tax liability. Hope your PI is up to date !!

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By AnonymousUser
31st Jul 2008 16:52

Recent change in policy
Until relatively recently, it was common policy for HMRC to accept ESC C16 applications where no actual signed assurances were given. In January of this year a lot of work was re-allocated to other districts - for example a lot of the Scotland South work ended up in North Wales Area - and those other districts started applying the letter of the concession, rather than accepting assurances from accountants.

In terms of practice, my policy was always to circulate a copy of the draft clearance letter to the directors and shareholders by e-mail (or, in the days before e-mail, at meetings), and obtain their agreement before submitting the C16 application. The wording then went along the lines "I am authorised by the directors and shareholders to give the assurances set out etc" and until the start of this year had not had one application rejected.

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Euan's picture
By Euan MacLennan
31st Jul 2008 13:38

No guidance?
You obviously have not looked at the HMRC Company Tax Manual CTM36220

As one of the undertakings that must be given in the application is that "the shareholders will pay any CGT liability", it seems obvious that every shareholder should sign the letter. As for the company, presumably HMRC views the letter as a deed by the company which requires to be executed by the signature of two officers or under CA 2006, a sole director and witness.

If accountants have been prepared to give these undertakings on behalf of companies and all their shareholders, I can only hope that their PI cover was in place at the time.

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By Chris Smail
31st Jul 2008 13:25

I am sorry but..
Do your directors all hold powers of attorney for the members?

We have always asked all directors and all members to sign an ESC C16 decleration. I can understand that one director could sign on behalf of the board, but how can he sign for the members individually?

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