Accountant Paul Soper
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How repeal of ESC C16 will hurt small business

14th Dec 2011
Accountant Paul Soper
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Tax lecturer Paul Soper has launched a campaign against revising extra statutory concession C16 in a way that will discriminate against small business.

In a series of posts and comments on AccountingWEB, Soper set out the circumstances in which ESC C16 currently applies, and demonstrated how the new regime that will take effect from 1 March 2012 will cost small business owners more. He has also set up an e-petition calling for the new statutory arrangement to be dropped. This article pulls together his material to present an overview of the issue, and his arguments against the change.

The most cost-effective procedure to bring a company to an end is to make a distribution (a dividend) of its distributable reserves and then when the company has been emptied out apply for it to be struck off.  The more costly alternative is a formal liquidation undertaken by a liquidator on behalf of the members or the creditors that involves careful consideration of the company’s exposure to potential claims - and relatively high charges, estimated by HMRC to cost £7,500 for a typical, straightforward case.

The ESC C16 issue is often confused with the Bona Vacantia problem - as in AccountingWEB’s initial coverage of the story last week. Companies would have share capital, a non-distributable reserve, which was either left inside the company and so passed to the crown by default, or was extracted by an illegal dividend where the right to pursue the shareholders for that sum passed to the crown. 

Bona Vacantia, which is part of the Treasury Solicitor's Office, agreed that small sums of non-distributable reserves, up to £4,000, could be extracted without BV pressing its claim, provided that the persons extracting the cash had permission under ESC C16, which is where the confusion started.

The Companies Act 2006 provided that on a declaration of solvency by the directors the company could turn its non-distributable reserves into distributable reserves which is why BVC17, as Bona Vacantia's concession was called became redundant, and so in October they confirmed that they would no longer pursue their rights on behalf of the crown, regardless of the sum involved, unless it was impossible for the company to be revived.

How the changes will hurt

The tax position is quite separate.  It is a fundamental principle of taxation that any return to shareholders in excess of the original capital contributed is a distribution, or a dividend as it is more commonly called, and as such is chargeable to income tax.

For a basic rate taxpayer the tax credit extinguishes the basic rate liability, but 40% taxpayers and 50% taxpayers are charged at reduced rates of 32.5% and 42.5% respectively on dividend income from which the tax credit is deducted.  The net result is a liability of 25% and 36.11% respectively of the net distribution received.

But a liquidator's distribution is treated as a disposal chargeable to CGT in the hands of the shareholding individual (the position of corporate recipients is ignored for simplicity’s sake). 

Recognising the costs involved in liquidation, ESC C16 permitted a shareholder who had sought permission and provided certain assurances, including the use of s1000 and s1003 of Companies Act 2006 (also cited in the concession as s652 and 652A of the Companies Act 1986, the former statutory reference, to be confusing), to extract a distribution which would be treated as if it were a liquidator's distribution and hence give rise to a capital gain, and with Entrepreneur's Relief this could be at the rate of 10%, rather than it being taxed as income.

From 1 March 2012, by a measure which will be passed as a statutory instrument, the amount that can be treated as a liquidators distribution will be limited to £25,000. If the distribution exceeds this figure the whole sum will be taxed as income.  Obviously one would have to adopt a strategy of a double distribution, the first to reduce the reserves to £25,000 the second to use the new statutory method.

Last year, HMRC proposed a limit for this purpose of only £4,000 - coincidentally the same as BVC17. This was the source of some of the confusion around the new maximum, but setting it at £25,000 is little better.

For companies with values as follows the cost of the new measure for a 40% taxpayer can be calculated as additional tax of:

  • Distributable reserves of £25,000 - nil
  • Distributable reserves of £35,000 - £1,500
  • Distributable reserves of £45,000 - £3,000
  • Distributable reserves of £55,000 - £4,500
  • Distributable reserves of £65,000 - £6,000
  • Distributable reserves of £75,000 - £7,500

Sums previously charged as a gain at 10% are now charged as a distribution at 25%.  Based on HMRC’s £7,500 cost estimate for a straightforward liquidation, the department plans, in effect, to surcharge all taxpayers with distributable reserves between £25,000 and £75,000 because it would be more expensive to use a liquidator.

If a liquidation can be carried out for less, as some have suggested, it is still a surcharge on anyone with reserves giving a lower liability. Forcing taxpayers to use a more expensive option simply increases the cost of profit extraction on cessation of activity.

The anti-reform campaign

What can be done?  We can act together to produce such a force of opposition that HMRC are pressured into backing down, as they did with the income sharing rules.  A compromise might be to raise the limit to £75,000, avoiding the surcharge on smaller businesses.  An alternative would be for the government to allow a mechanism in company law so that smaller companies could indemnify practitioners who could then act as liquidators, or which would reduce the cost of liquidation to a more reasonable level.

The revenue want to move to self-assessment and are worried that this would be used wholesale for tax avoidance and evasion, hence the ludicrously low limit currently set, even though one would assume that with sums that small tax avoidance is probably not going to be an issue, whereas significantly larger sums may be.  The final result will be that more companies get struck off without notifying HMRC who lose even greater sums in taxation - earlier this year Richard Murphy suggested that thousands of companies already disappear in this fashion every year - yet ESC C16 required companies to approach HMRC for approval, hardly a recipe for a disappearing act.

If HMRC thinks there may be situations where ESC C16 is being used for avoidance purposes then the answer is not to burden these small businesses with needless additional costs, but to include a Targeted Anti Avoidance Rule so that where a taxpayer uses this method of extraction as a means to avoid an income tax liability, for example by transferring the business to a new entity, whilst having the old entity struck off so that distributable profits may be extracted in capital rather than income form, then HMRC would have the ability to raise discovery assessments to recoup the tax lost.

Arguments in favour

  • Paul Scholes: “The current unofficial regime has been a bonus... There has been huge tax avoidance by companies building up mega funds that might well have been regarded as investment operations rather than trading concerns. This provision brings some reality to their situation and the cost of an IP is just the medicine they have to take. My main complaint is that companies will still be struck off with no submissions and no policing by HMRC or Companies House…  a far more joined up approach is needed.”
  • George Attazader: “It's better to have the relief on a statutory footing, than to not have it at all.  That way at least there's scope for getting the limit increased.”
  • HMRC’s Andrea Price: “At the moment, there is a measure of built-in protection against abuse. Application to use the concession has to be made to the local inspector who in turn has to be satisfied that the conditions attaching to the concession are met. In the future eligibility to use the legislated concession will be self-assessed - this presents a considerable potential risk to the revenue. The application of a monetary ceiling is intended to mitigate this risk by limiting the opportunity for abuse, while at the same time preserving access to the favourable tax treatment for large numbers of shareholders in small and micro businesses. The measure is expected to have a negligible impact on receipts as it is intended in tax terms to largely replicate the status quo, once behavioural change is taken into account.”

Further information on this and other tax issues can be found on Paul Soper’s website,


Replies (4)

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David Ross
By davidross
16th Dec 2011 12:02

Greedy Insolvency Practitioners should not profit

I'll sign any petition against abolishing the present regime

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By acsmercerlewin
16th Dec 2011 12:02


This proposed limit is badly thought through by HMRC. Any tax avoider will just go to a liquidator anyway so there is likely to be no tax saved at all.

If HMRC want to be notified then put a clearance provision in the legislation. In any case, Companies House ask HMRC before striking off a company as they have the right to object if taxes remain unpaid.

I agree that this limit is illogical and unjust. Probably good news for IPs though!!

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By Briar
16th Dec 2011 15:46

I agree with David Ross

Don't use C16 very often but would like to if a case came up. And, I totally agree with David Ross, so I have signed the e-petition

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16th Dec 2011 19:03

I have signed the e-petition

If you read the postings the HMRC justification is comlete garbage - just a fudge to avoid admitting they got it wrong when they said they wanted to change it.

They admit openly that you can always get CGT treatment by appointing a liquidator. So they effectively admit that small business (and yes, businesses remain small hundreds of £k in excess of £25k of retained profit) must pay an insolvency practitioner unnecessarily for something they can do in 5 minutes with £10 and a form filed at CoH.

The government need to make up their mind as a matter of policy whether or not they accept that retained profits can be distributed subject to CGT when the life of a company comes to an end. All or nothing - no in between.

If the answer is "YES" then all that is required is a statutory version of ESC C16 accompanied by a declaration of solvency by the shareholders on pain of personal liability if falsely or negligently given.

If the answer is "NO" then that's fine too - at least we know where we stand. Same declaration of solvency, different tax result.

Either way there is no need for completely unnecessary liquidator's fees. For goodness sake, this is supposed to be a givernment doing away with red tape for business!


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