Capital Redemption Reserve and ESC16

Capital Redemption Reserve and ESC16

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I have a client with £100k share capital and is now looking to wind the company up.

I had instructed client that a formal winding up will be required since share capital is in excess of £4,000. Now, another accountant has come up with the following solution:

1. Company purchases £97k of shares - it has sufficient reserves so no whitewash is required.
2.
Colin Higginson

Replies (20)

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By billgilcom
28th Nov 2007 07:41

Which is more expensive
Apologies in advance for the ignorance but
(a) which would be the most expensive to take care of
and
(b) will it get clearance under either the "Coy buyback oif shares" or ESC C16
regards
[email protected]

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By AnonymousUser
28th Nov 2007 15:01

The Treasury Solicitor...
..has confirmed that they treat the £4,000 limit as applying to anything that is regarded as share capital for the purposes of Part V of the Companies Act 1985.

By s170 CA 1985, Capital Redemption Reserve is regarded as share capital.

So the other accountant's cunning plan will not work!

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By colinhigginson
28th Nov 2007 10:48

Yes and both
Liquidation would certainly be most expensive.

The company would first ask for clearance to purchase own shares AND then ESC16. There shouldn't be a problem with either.

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By stephenkendrew
28th Nov 2007 11:14

purchase of own shares
"there shouldn't be a problem with either"

Are you sure?

I thought that one of the conditions for HMRC to accept that a purchase of own shares is to be treated as a capital distribution is that it must benefit the company's trade.

I can't see how the proposed treatment would do this in which case you have the danger that HMRC deem the £97K to be an income distribution much of which would be subject to higher rate tax.

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By colinhigginson
28th Nov 2007 12:05

I agree
I think that not only is ot not to benefit the trade, but it is also part of a scheme to treat income as capital rather than income.

Part of my original post has not been put on - I was wondering in any case whether the capital rdemption reserve was treated in the same way as shares, in which case the treasury solicitor would still go after the cash.

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By dougc99
03rd Dec 2007 17:21

Companies Act 2006
Would this also be caught under the companies act 2006.
If the shareholder is also a Director would he not be caught under his duties as a Director towards the Company.

i.e. Promote Success of company, Avoid Conflict of interest

I would be looking for evidence of the following;
They would need to show that they have acted dilligently in their duties and show the arguments as to why it is in the companies best interest to buy the shares back.

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By User deleted
03rd Dec 2007 17:22

One Option
One option that may be worth considering:

I have heard it suggested that you make the company an unlimited company, which removes the capital requirements and all cash can be distributed.

However, the shareholders would need to be happy with taking on unlimited liability - depends then on the company history.

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By User deleted
03rd Dec 2007 18:37

From the information here
It would appear that a Member's Voluntary Liquidation followed by a distribution (is it capital or income?) might be the cheapest option after all. I assume the company is asset rich.

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By colinhigginson
04th Dec 2007 12:30

Thanks for all your comments.

As an update, we are fine with ESC16 as there will be no profit so it can be treated as income. ie Cost £97k, Sale £97k = nil assessable as income.

The answer with regards the Capital Redemption is that according to the other accountant, the Treasury solicitor is legally entitled to it, but in practical terms never chases it up. Since a company dislloved under 652a can be restored, it is a big risk to take in my opinion.

The answer with regards going unlimited is one that we have been looking at.

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By AnonymousUser
04th Dec 2007 14:13

Sorry...
...don't at all understand your first sentence about there being no profit. The whole point of using ESC C16 is so that the £97k is NOT treated as income but as capital gain.

If it is treated as income, what costs could you deduct from it?

The second sentence does not make much sense either. The Treasury Solicitor is just as likely to chase £97k of Capital Redemption Reserve as £97k of ordinary share capital.

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By billgilcom
04th Dec 2007 17:40

Income Distribution
The "bonus" issue of shares followed by their realisation would in my unresearched view amount to a distribution as income.

If you want to consider this further would need to review all the old S203- 209 distribution statutes think 209(3) or 209(4) from memory
regards and hope this helps
[email protected]
http://www.wamstaxltd.com

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By billgilcom
04th Dec 2007 17:54

S211
Sorry it is S211 that makes the repayment of share capital after a bonus issue for no new consideration an income distribution
regards
[email protected]
http://www.wamstaxltd.com

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By colinhigginson
04th Dec 2007 16:46

Here goes
The first sentence is saying that ESC16 is not required prior to the shares being purchased. This is so that the treatment will be as income since the company would return £97k cash to the shareholders for shares which cost £97k.

Hence, the income assessable would be nil as there is no profit.

Now to point 2. Once you had done the buyback of shares, you would then apply for ESC16 so that the Profit & Loss account is treated as capital.

The other accountant has done many of these transactions and assures us that the Treasury Solicitor has NEVER gone after the Capital Redemption Reserve on any of their cases. Also, these successful transactions have been for substantial amounts, some multi million.

It is all about risk - do you save the £8kish liquidator fees in the knowledge that the Treasuiry Solicitor COULD restore the company and request the £97k or do you pay the fees and rest easy.

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By billgilcom
04th Dec 2007 17:58

Hello HMRC
No doubt HMRC will be interested in this thread of postings

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By AnonymousUser
04th Dec 2007 18:00

Still doesn't make sense!
If the £97k paid out on the share buy-back is treated as income rather than capital you can't deduct the cost of the shares from it because you can't deduct capital from income. The shareholders will just receive an income distribution of £97k (with no deduction) taxable at their marginal rate.

If the share buy-back happens there will be £97k less P&L and £97k more Capital Redemption Reserve. It is the £97k of cash that the CRR represents that cannot be distributed without a formal liquidation.

If it is paid out as an illegal distribution of capital, the Treasury Solicitor does not have to get the company restored in order to get his hands on it. He simply goes after the shareholders who have it and demands it back because it still legally belonged to the company before it was struck off and therefore became bona vacantia .- ie the property of the Crown.

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By User deleted
05th Dec 2007 10:45

Previous liquidations do not affect current ones
Your other accountant friend may well have had MANY deals in the past where multi-millions of un-distributable reserves were paid out to shareholders and the treasury solicitor didn't take the point.

However, they do now take the point. They issued a release a few months ago confirming that they will ALWAYS take the point, unless the un-distributable reserves are under £4,000 (their view of a liquidators charges for a small company).

I would be prepared to guess that there is someone in the department whose job it is to check against all companies that apply to be struck off on this very point.

Also, I don't understand your point about the distinction between some of the distribution being income (albeit nil) and some being capital. A distribution from the company is either income or capital in nature (and in some cases if capital the tax rules override and say it is income).

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By User deleted
05th Dec 2007 16:59

So
If the company went into MVL, would the shareholders only be subject to CGT on the amount paid back to them?

I note there is a minimum of £200k net assets, £8k wont exactly break the bank, and I'm sure you could charge the IP £2000-2500 of that fee for tax advice.

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By billgilcom
06th Dec 2007 01:19

Our commission
I take it you will remember to send the contributors their commission out of your fat fee ... after all Christmas is just around the corner
regards
[email protected]

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By colinhigginson
06th Dec 2007 11:01

I agree
If I were the taxpayer I would use a liquidator, pay the fee and rest easy.

We are caught a bit, we act for this company and he has another much larger company where they use another accountant. It is the other accountant who is offering this solution.

We have even said that we will let it go and let them deal with the paperwork with their 'solution'.

Incidentally on the buyback of shares the distribution is the excess of income over shares subscribed so if you return £97k for £97k of shares the distribution is nil.

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By jdf54
16th Dec 2010 14:02

Capital redemption reserve

My understanding is that a company may now reclassify a Cap red reserve as a revenue reserve without a court order. We have a private co subsid which is dormant and solvent and want to dividend up its reserves (including the large cap red reserve) so that it can be dissolved under the ESC.

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