MPs wave through ESC C16 revision

Not surprised at all and, to be honest it's not the end of the world and I'm sure that, given the current feelings around concerning the inequalities in society, the vast majority of the country are unlikely to shed any tears over forcing higher rate tax payers to pay out a few thousand to get their hands on >90% of their undistributed and, let's face it, dormant funds.

Most families in the country have to make use of every penny that comes in, they don't have the luxury of leaving cash to fester, so let's move on eh?

My gripe is with what appear to be thousands of strike offs at companies house where ESC C16 plays no part in the process because the directors ignore HMRC and just send in their DS01 & £10 and the powers that be fail to see the need to put resources in place to police it?  

We probably need a senior civil servant or football manager to do it & get caught before anyone will take notice.

(I raised the point previously but no-one has yet commented) ....

Is when do distributions stop being 'normal' distributions and become distributions in anticipation of a dissolution? The legislation applies not only to a single distribution but to all distributions made in anticipation of a dissolution. Where distributable reserves amount to £40k for instance, a solution would be to pay a 'normal' dividend of £15,001, thereby bringing the balance into capital treatment. What no-one seems to be able to answer (perhaps I'm just missing the obvious) is  - what is it that would bring that first distribution within the new legislation? 

Hi BKD - The answer to your question is in Paul Soper's paragraph above starting "The worst of all this".

I don't see that it's worst at all as it seems to make sense to me, in that if you've had enough of your company and make an ESC C16 application that states that you've had enough and now want to distribute without a winding up, then obviously, anything you draw after that is in anticipation of your intent.

So, as Paul says, all you do is hold onto your ESC C16 letter, and draw up a normal minute/voucher for a dividend, pay it, then get fed up with your company and fill out & send the ESC C16 letter (with £25K left in the company).

Am I alone in thinking that his may well turn out to be a good thing for many of our clients and indeed us ? We've already struck a deal with our local friendly liquidator and as Paul Soper says it mainly applies to Micros anyway... from my experience would typically be the micros with up to £500k left in the pot after the owners retire or go and work in B&Q. I've already set up planning for 2 such clients where had ESCC16 carried on they'd probably have taken the cash and 10% tax in one hit. However I asked the rather obvious question "do you actually need the funds right now?" Having projected their total income over the next few years (both spousal set ups) in both cases they should be able to extract the funds through tax free dividends easily within 5 years. I have projected the total lost tax to HMRC at c£45k and reached an agreement with our client to pass some of this saving to us as a show of thanks for dealing with the compliance issues until we can DSO them.

Trebles all round....the spirit of Gordon "NIL rate £10k band" Brown lives on..

Pembo, what you have described is exactly what we have been advising some clients to do over the past few years.

For many, the regular income of a "tax free" dividend is much more attractive that getting a large lump sum and having to pay 10% tax. I can see this being used in a large number of cases where the alternative is a £7,500 liquidator's fee.

As with so much legislation over the past few years, the Treasury have just ensured that they will receive a lesser amount of tax because they won't listen.

As this is clearly adding another piece of red tape to businesses, I wonder which other strand of red tape will be abolished under the government's vaunted "one in one out" rule?

We'll need that Boris Island soon for somewhere for the pigs to take off and land.

Pembo/Mallock, same here.  In both my cases they are elderly basic rate tax payers.  I have had two other potentials retiring on >40K pa pensions who will not have a problem paying £2.5K - £3K + VAT (local IP quote) to release the funds at <10%. 

.. it's not obvious at all. The legislation covers distributions where the company intends to seek dissolution (ie in addition to distributions where it has already commenced proceedings). Assume that we are now in the new regime - ESC C16 has gone. So, I declare a dividend of £x tomorrow and, a week later, apply for dissolution. Is tomorrow's distribution caught or isn't it?

The legislation applies where

"This section applies where—(a)the procedure in section 1000 of the Companies Act 2006(2) (power to strike off company not carrying on business or in operation) has been commenced in relation to a company, and
(b)the company makes a distribution in respect of share capital in anticipation of its dissolution under that section.

and also

"This section also applies where—(a)a company intends to make, or has made, an application under section 1003 of that Act (striking off on application by company), and
(b)the company makes a distribution in respect of share capital in anticipation of its dissolution under that section.

So the appropriate action is to make a distribution in respect of reserves before moving forward to have the company struck off, evidenced by a board meeting between the distribution and the decision to seek striking off, and hoping that this would not be a distribution in anticipation...

There has to be a legal dividing line between a 'normal' distribution and one in anticipation of striking off and the only evidence will be be contained in genuine board resolution.  Yes this is a nonsense if we are talking about a one-person company but what else can be done?  Appoint a liquidator at not insignificant cost.

Hence my suggestion that a new 'low-cost' liquidation route is sought.

thought that HMRC are quite aware of what has been going on and this is their way of trying to stop the "dividend" route. Let's see how many are challenged and what the tribunals come up with. Mind you how do you prove intent? OK a robber goes equiped. A Football manager has an offshore bank account in his aunties best mates cats nickname.

"Right sir you've drawn your pension therefore you intend to stop trading".

Yes, I see what you mean but in reality, as with much of company or tax law, an intention has to be taken on the facts of each case and so, if there's any mystery about what your intention was at the time, and that mystery could come back & bite you on the bum, you make sure you have something in writing to evidence your thinking at the time.

In many cases, in particular because of the three month rule (S1004), it could be implied that a company had ceased all operations and was preparing to wind itself up so that, in your example, a distribution a week before the strike off application might be challenged however I would suggest that that will only tend to happen with someone who hasn't taken proper advice from someone like you or me or who doesn't give a monkeys and just strikes the company off without any intention of telling HMRC.

So for me still a minor change but, as I say above, one that will not combat the main problem of the strike off process.

EDIT: written before Paul Soper's comment above

“Before the throne of the Almighty, man will be judged not by his acts but by his intentions. For God alone reads our hearts.”  

To this hitherto exclusive list we can now add Dave Hartnett and his motley crew....

As usual the revenue make it simple for themselves by making it complicated for small business, and a measure designed to create certainty creates uncertainty.

There have been cases, mainly IHT cases, where a trade activity ceased, and then death occured, where the executors successfully argued that there was still a continuing intention to trade (eg Brown's exors v CIR 1996) at the date of death so that Business Property Relief could be given.  Until the directors positively resolve to that the company is of no further use it could be used as a vehicle for future activity and so distributions should not be caught as in anticipation of a winding up order.  Of course it will come down to evidence, but should it?  If you approach HMRC now requesting ESC C16 one of the assurances you have to give is that it is not intended that any activity will be carried on other that collecting debts due and paying debts owed.

We have historically signed and submitted applications to HMRC without any issues (numbering probably hundreds over the years).

The last handful that we have sent in since the new year seem to be getting rejected for no apparently good reason.

As stated we have signed these on behalf of clients in the past and have now had them rejected as the director must sign. Appreciate this is correct but have had literally hundreds go through with us signing them.

The latest is that we have had an application rejected becuase final accounts have not been included. Again this has NEVER happened before and does not appear to be one of the requirements for application.

Have you seen a change in HMRC treatment of applications?

Are you finding that they are asking more than they used to?

As I think is becoming clear it is the uncertainty that is likely to cause the problem. It would be very easy to demonstrate that any distributions were made when the company intended to be struck off if they were declared after a board minute to that effect. But what we are more interested in here is trying to prove an absence of such intent, and we all know difficult it can be to prove a negative. Just because a board minute is drawn up on a particular date, doesn't mean that the intention wasn't already there. Having said that, if HMRC were to issue guidance such that they will treat all dividends paid in advance of such a resolution as being 'normal' dividends that would be helpful.

I was going to provide an example very similar to Paul Soper's. Say I pay a dividend today, my co-director is run over by the proverbial bus tomorrow and I immediately decide to wind up the company and make an application to Cos House? In the real world, quite an improbable scenario, but it could happen. When the legislation starts to talk about fixed limits such as the £25k, it has to be equally clear as to what is and what is not included in that £25k. As things stand, it is anything but clear.

are taking a leaf out of the FA's book - guilty until proved either way.

The only way I see that might stop a challenge is if the dividend or minutes said, "this dividend has been issued where a trade etc. is ongoing". I suppose one could always use the company as a R&D for retirement and show the expenses.

"Whether a distribution is made in anticipation of dissolution is clearly a question of fact. I would expect a local inspector to look at all the relevant circumstances, including the normal pattern of distributions made by the company, the relevant Board minutes and so forth. In the example you give, in the absence of any clear indications to the contrary, I would expect both distributions to be treated as made in anticipation of a distribution."

In other words - uncertainty and scope for abuse

is what HMRC thrive on. They love being able to speculate. It means that they can go walkabout or fishing trips. Lets face it if there was certainty HR would never have got to court.

One could always argue that there will never be an intention to cease trading even if there is no income. That could happen anyway regardless of age.

Maybe I'm missing something, but I gathered that the intent of the legislation was to stop abuse of the system by people phoenixing companies over and over.

All this does is make it more expensive for them to do it, but on £50k odd, they'd still save £8k less £2.5k liquidation exps = £5.5k. All it does it harm the normal law abiding client.

I've got a lot of SME clients on my books who have been prudent and retained funds in the business of about £50k-£100k for when their company stops trading and they have no income for a while before finding a permanent job, so now they have to, for no good reason, pay a local liquidator £2500 min to obtain their money under CGT. Why?

Incidentally I spoke to HMRC yesterday about an existing ESC C16 case. Rang up, quoted the tax ref and nothing else, and the bloke quoted me all sorts of figures from the submitted accounts and CT600 - I didn't even say who I was or who I was calling from. Security eh!

Hi All

I was hoping you may be able to assist me with a query I would like to clarify, regarding the £25,000 limit.

The legislation repeatedly refers to share capital:

1030A    Distributions in respect of share capital prior to dissolution of company

(1) This section applies where—.....

(b)the company makes a distribution in respect of share capital in anticipation of its dissolution under that section

Could a strict interpretation of the legislation not therefore mean that the restriction would therefore only apply where share capital was more than £25,000?

If share capital is £100, then would any distribution in respect of share capital not be £100 and the remaining distribution not be in respect of share capital and therefore be under the £25,000 limit regardless of the total distribution?

All comments on here and elsewhere appear to refer to the legislation having effect when the total distribution is more than £25,000, I just wondered if anyone had any comments regarding the above?

Thanks in advance

It doesn't stop it at all - that is just the smokescreen that the revenue are using to justify loading the problem onto the client and the profession.  If you phoenix from a close company you will still be caught by the transactions in securities anti-avoidance provisions just as you would have been before whether you appoint a liquidator or not.  You are quite right, "all it does is harm the normal law abiding client".

Vickia86 beat me to it.

I seem to recall a recent CPD seminar with (I think) Rebecca B, where she was talking along the lines that it was in respect of capital rather than undistributed reserves.

Perhaps Rebecca can give us her pearls of wisdom on this one?

Simply refers to something done to a person in their capacity as a shareholder (CTA 2010 s1113).

Look at it another way, based on Vickia86's interpretation a payment of £100k where there is £100k of share capital would be caught. I do not believe that to be correct, since a distribution does not include an amount attributable to repayment of capital.

Would so like to drop "Pheonixing" to describe what people do, because I always have to look up the spelling, how about an old IT process of "Dump & Restart" like that far better?

Anyway, with regard to share capital the legislation refers to this because on a winding up the distribution you get is for your share capital, doesn't matter what it represented the day before, P&L, share premium, capital reserves, on liquidation the money you get is for your share capital.

So what they are saying is that, if you don't wind up but just strike off, we are happy for you to treat £25K as share capital.

With regard to "dump & restart" you have always been able to do this if you go through a formal winding up, there's no problem with it at all.  The theory is that the liquidator's duty is to realise the assets of the company for as much as poss and if that results in the owner actually buying any business off the liquidator then a formal valuation will be sought and the owner asked to pay it, which will then flow back to him or her as realisation of the share capital.  This then starts the new biz going again, with a higher start value.

Obviously, without a formal liquidation, the incentive is to dump & restart, just declaring the cash as proceeds & not any goodwilland having a new business starting from £0.

Finally, the alternative is to ignore all of this and not get HMRC involved at all, Companies House will do everything you need with a form & a £10 cheque.

.... take my example above. Cash £100k, Share capital £100k. Will the payment of £100k be caught under the new legislation?

A distribution occurs whenever an amount in excess of the original capital contributed is returned to a shareholder whether in cash or kind.

Use a formal liquidation to avoid transactions in securities?  Don't think so - try the Joiner case - a liquidation agreement (these days caled a 'pre-pack') is a transaction in securities, if it's a close company, if there is a tax advantage, you're caught.

Not my forte.  Can you say how a formal liquidation of a close company could be used in an attempt to avoid tax and would be caught by the TIS legislation so that I can get my head around what is & isn't OK?

Thanks

Liquidation by itself is not a transaction in securities, neither, in isolation is the payment of a dividend.  But where there is a liquidation agreement under which company A is closed and its trade transferred as part of the liquidation to company B formed for the purpose the entirety of the transaction is caught by the transactions in securities rules, which is exactly what happened many years ago in the Joiner v CIR case.

That makes sense, so, in a case such as I describe, where the reorganisation/transfer has taken place for bona-fide commercial reasons, you would clearly need to apply for clearance.

Under the old Transactions in securities rules if you could show that a transfer was for bona fide commercial reasons and a tax advantage was not an object or main object you could get clearance.  Since 2010 the rules have been rewritten , now focus on close companies, but no longer have an exclusion for bona fide commercial transactions.  If there is a tax advantage the only exclusion is to demonstrate a fundamental change of ownership where at least 75% is in the hands, after the transaction, of persons you are not connected with then or in the previous 2 years.  You can still apply for clearance but I haven't spoken to anyone yet who has sought clearance under the new rules. 

Just dipped into the legislation, rummaged about a bit & thought better of it!  One of those areas where it's not important to know about changes until it's important, fortunately I've had nothing like it in years but please to be forewarned.  Thanks

So if a client wants to apply for the concession before 1st March, is the requirement that the distribution is made before that date and the concession applied for before then, or is it the concession has to be granted before 1st March and a distribution made?

Can't see the answer anywhere and the significance is, surely HMRC could simply delay granting the concession until after 1st March, in which case, say a client paid out £100k in anticipation of it being granted - suddenly they've got £75k of income taxable funds?! Can't see that being right.

Provided you can seek permission and get clearance by 29 February you will still be OK under the old rules but you are right, HMRC could delay and then the new rules will apply because the statute refers to distributions made after an application has been made.  And you would have a distribution of £100,000 not £75,000 because the limit applies in aggregate.  To reduce the reserves to £25,000 requires action before you contemplate using s1003 CA 2006.

Doesn't seem fair does it - HMRC can delay responding until after 1st March to secure a preferential result for them. I'm still waiting to hear back from them regarding a couple of ESCs from before so a bit worried!

The law is an ass sometimes...