ESC C16 - interim capital distributions

ESC C16 - interim capital distributions

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When a company ceases trading, applies for clearance under ESC C16 and applies to have the company struck off under s.652A CA 1985, it has been considered good practice to make an interim distribution of the remaining funds as soon as possible after the cessation of trading in order to avoid any possible tainting of the company's trading status for capital gain tax purposes - and, of course, the shareholders want their money out as soon as possible.

What is the relevant year for reporting the capital gain on the shareholders' personal tax returns? Is it based on:
- the date of each actual distribution, which might well span two tax years, or
- the date of the final distribution, or
- the date of dissolution of the company?

The first option would be advantageous because of the availability of two annual exemptions.

Euan MacLennan

Replies (10)

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By Malcolm Veall
12th Mar 2009 10:48

Spread Dividends
IR,

There is no problem with your approach of spreading dividends over a several year's time frame, how could there be? - no concessionary treatment is involved. I have a nearing retirment age client who is planning to cut down his workload as the years go by and then ditribute reserves as dividends which will all be within his basic rate band.

The problem is younger clients who want the money now.

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By User deleted
11th Mar 2009 16:54

I agree Tax Advisor
Yes - I forgot to make the point that there must be no other income for the scheme to work.

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By User deleted
11th Mar 2009 16:52

Tax credits
Don't forget that dividends may have an adverse impact on claims for child tax credits etc.

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By User deleted
11th Mar 2009 16:37

split
I've always advised splitting the distributions when your this close to the year end, the date of the actual distribution is the date of the (part) disposal for CGT. Utilise the annual exemption and any lower rate bands this year and take the rest next year to delay the tax payment. Bear in mind this is a concession, the Revenue can deny its use and there is some doubt that it will be legislated for because it is so widely used to avoid income tax on profit extraction.

As with all ESC C16s dont forget the dreaded Bona Vacantia if there is significant amount of share capital...

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By User deleted
11th Mar 2009 16:18

IR assumes that there will be no other income
during the ensuing years for the individual. On this basis, the simple scheme can work whereas if the additional dividends cause additional taxes, then we will be back to square 1. Do you agree IR?

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By User deleted
11th Mar 2009 14:59

Dividends
Just in relation to what Ken said (towards the end of comment), would HMRC have a problem with gradually paying dividends until the undistributed reserves have been fully distributed, i.e. only pay enough to stay within the 10% band and get the 10% tax credit so no actual tax to pay. During this time, dormant company accounts would be filed until striking off at the end? Also, no ESC C16 malarky would be involved. Just insert dividends into personal tax return and no CT return would be required since trading ceased in the company.
Is there something wrong with this method? It seems too straight forward!

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By kenmoody
09th Mar 2009 16:22

I hadn't come across that before ...
... and can only assume a maverick inspector was involved. Although the concession refers to distribution singular you can't read concessions as if they were the rule of law - though ESC C16 is shortly to be legislated. At any rate, the HMRC guidance at CTM 36220 clearly contemplates more than one distribution. The intention is to equate distributions following an ESC C16 application (and even before in some cases) as if they were distributions in a winding up and of course it is quite common for a number of distributions to be made by a liquidator as assets are realised. It is quite unrealistic to expect that only one distribution will be made as it may take time to realise all the assets and pay off debts. Also funds need to be retained to pay the CT and there is quite often a small balance to distribute afterwards. The alternative would be that the company would have to retain all the funds until it is in a position to make a final distribution. I don't think HMRC have ever required this. It's possible that distributions could be made so as to spread the tax liability into different years and lower the overall liability. If HMRC considered that as avoidance they would have to withdraw the concession, which is always worth bearing in mind if manipulation of distributions for tax advantage were intended. Without the concession the payments would be dividends, so you don't want to try to box too clever with this. As with distributions in liquidation each distribution is treated as a part disposal at the time of receipt.

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By User deleted
08th Mar 2009 11:00

Be careful!
It is very important for you to notify HMRC in advance if you are planning more than one distribution. They turned me down once on the grounds that C16 talks about 'the distribution' (singular) and that the use of two distributions clearly indicated that avoidance was involved.

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By thomas34
06th Mar 2009 13:02

Euean
For "creditors", please read "debtors".

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By thomas34
06th Mar 2009 12:39

ESC C16
Euean, I did one of these about 3 years ago and used the dates of distribution for CGT purposes. It did indeed cover 2 tax years although wasn't planned that way for tax reasons - the first distribution covered the bulk of the assets and the second was many months later due to slow collection of debts. I suspect that many companies will take at least a year to collect in all monies if only because creditors know the situation and try to avoid paying up.

I didn't rush to file the 652a as I thought that even a small amount of bank charges might constitute trading. Hope I did it right and that this helps.

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