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Rule changes means company owners could pay more tax on winding up

21st May 2012
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Shareholders of companies which de-register are likely to pay more tax on the final distribution of capital, following a recent change in the law.

Until 1 March 2012, a solvent company could be wound up in a way which meant the cash the shareholders received was taxed as a capital gain, not as income. To do this required the permission of HMRC, using an extra-statutory concession E16 (ESC C16).

Around 325,000 companies took this route in 2010, which also avoided the costs of formal winding up procedures under the Companies Act.

But ESC C16 has been replaced by sections 1030A and 1030B of the Corporation Tax Act 2010, which removes the need to get permission from HMRC but introduces a limit of £25,000 on distributions which are taxed as capital. If distributions exceed £25,000, all of them will be taxed as income.

For shareholders who are also higher rate tax payers, this could result in a substantial tax bill. This change has sent accountants and tax planners looking for more tax efficient methods of winding up solvent companies.

Members voluntary liquidation

The other method of closing down a company which is not insolvent is to conduct a members voluntary liquidation (MVL) using an insolvency practitioner. This allows assets in excess of £25,000 to be converted into cash and extracted under capital, rather than income, taxes.

However, an MVL is not an option if the company is facing any sort of cash flow difficulties or if creditors have begun any actions for recovery of debts. In these circumstances, advice should be sought from an insolvency practitioner about the best way forward.

An MVL could be ideal for companies which have reached the end of their life, such as when the owners want to sell or close down the business and then wind up the company.

Ironically, while the company must be solvent before embarking on an MVL, the process must be overseen by a licensed insolvency practitioner. This introduces an extra set of costs, which could run into several thousands of pounds, depending on the complexity of the process.

Mixed views on the impact of winding up rule change

HMRC’s view is that this change in the rules will have a negligible impact on individuals, but accepts that companies who adopt formal winding up procedures could be charged £7,500, or even more, in costs.

However, accountancy bodies and other commentators are more cautious. The interpretation of how the £25,000 in final distributions will be calculated is of concern to the ICAEW, while the ACCA believes the introduction of the monetary limit significantly reduces what was a valuable concession to business owners.

The main beneficiaries of this change could be insolvency practitioners, who find themselves required to wind up many more firms using an MVL, as shareholders seek to minimise the amount of tax they are required to pay.

Enactment of extra-statutory concession E16: http://www.hmrc.gov.uk/tiin/tiin-esc-c16.htm

ICAEW tax faculty comments: http://www.ion.icaew.com/TaxFaculty/23935

ACCA comments: http://www2.accaglobal.com/general/activities/technical/archive_v2/subject/taxation/cdr1016

This is a guest post by Jasper Martens from Simply Business who offer a range of Invoice Finance solutions.

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