ICPA Analysis: End of the line for ESC C16?

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Solvent companies: end of the line for ESC C16?

Debbie Cockerton explains the ins and outs of winding up a solvent company

As a licensed insolvency practitioner I have to deal with both corporate and personal clients that have financial problems and need guidance on how to deal with their financial affairs and how they should best protect themselves from the pitfalls that may arise according to statute (Insolvency Act, Insolvency Rules and the Companies Act).

My services are also required, when it comes to winding up a solvent company where the company has reached the end of its shelf life and the shareholders want to extract their profits from the company. Yes, you will still need an Insolvency Practitioner to wind up a solvent company!

Extra Statutory Concession C16 is a concession granted by HMRC that allows the directors of a company to effectively wind up a solvent company themselves without appointing a liquidator and pass the surplus funds to the shareholders as capital receipts, rather than dividends. This has the dual benefits of a likely lower tax charge on the shareholders (capital gains tax rather than income tax) and also avoids the costs of the liquidator.

This concession is, however, now set to be substantially restricted and the guidelines have now been withdrawn by the Treasury Solicitor’s office.

If the proposed change becomes law, then a formal Members Voluntary Liquidation (MVL) will be the only way of achieving distribution to shareholders as a capital receipt rather than income, for distributions over £4,000. Business advisers will have to consider whether the tax benefit to shareholders in terms of receiving a distribution as a capital receipt rather than an income dividend, will outweigh the cost of appointing a liquidator.

Once a limited company has gone into liquidation, any dividends paid to the shareholders count as capital receipts, rather than dividend income. This means that they are subject to the capital gains tax regime, rather than the income tax regime.

A further advantage of the MVL procedure is that it will protect the company/directors from any previously unidentified contingent creditors that might arise in the future. The company cannot be re-instated to the register for the directors to face action, provided the proper procedure has been followed.

In a MVL, no conduct report is submitted on the director’s conduct. As the liquidation process is dealt with by the insolvency practitioner, the company is wound up in an efficient manner and it is possible sometimes, to receive the majority of surplus funds from the company straight away, while the liquidator deals with the liquidation process.

The procedure can also be utilised to carry out ‘Section 110 Restructures’, which allows a liquidator to accept shares in a new company or companies as consideration for a part or whole disposal of the business of the company in liquidation.

• Debbie Cockerton, KSA Business Recovery. For details call 01702 344558, or email [email protected]

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at  www.icpa.org.uk  or email [email protected]  or by ‘phone on 0800-074-2896

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