End of the line for ESC C16?by
Andy White from CBW explains how Extra Statutory Concession C16 can reduce the tax liability when companies are struck off, and warns that it may become less generous when it moves to a statutory footing.
For many years HMRC has operated a number of “extra-statutory concessions” that set out circumstances in which the department will not collect tax which is legally due.
Concession C16 sounds like it could be a bus route to Nether Wallop, but is actually a popular concession which may also be at risk from government cutbacks. A consultation document published in January set out a raft of planned revisions for ESCs including C16. This explains how the concession currently works, and how it may be affected by the review.
When a company comes to the end of its useful life, a liquidation followed by a division of assets amongst the shareholders will be subject to capital gains tax (CGT). With the differential between income tax and capital gains tax rates currently so large, this represents a very tax-efficient way of winding up a company’s affairs. The availability of the annual CGT exemption as well as the possibility of Entrepreneurs Relief reducing the headline rate to 10% add to the attractions.
The alternative method of disposing of the company is to have it struck from the Register of Companies. This is a very cost-effective informal procedure which has become increasingly popular.
Formal liquidations can be expensive and time-consuming, yet a distribution of the proceeds without a formal liquidation cannot be treated as a capital distribution. If the informal “striking-off procedure” is used, then the strict legal position is that any distribution to shareholders would be subject to income tax, as if it were a dividend.
Enter ESC C16. Providing certain conditions are met, the concession allows a distribution to shareholders ahead of an informal striking off to be treated as a capital receipt subject to CGT. Shareholders can use the concession to extract the assets from a company without a heavy tax penalty and without the costs of a formal winding-up.
One frequently overlooked aspect of ESC C16 has nothing to do with tax, but is a company law issue. Strictly speaking, distributions do not include the repayment of paid-up share capital. Since ESC C16 does not apply for company law purposes but is a tax provision only, it does not allow assets representing share capital to be distributed. Such an action would be unlawful in company law terms.
In the absence of a winding up procedure the company's share capital is strictly “bona vacantia”, which means it becomes an asset of the Crown, Duchy of Lancaster or the Duke of Cornwall.
In practice the Treasury Solicitor will allow up to £4,000 to be repaid without seeking recovery as an unauthorised distribution. Given that most small companies have a share capital of as little as £2, with the remaining assets representing reserves, this does not usually present a practical problem.
Recent announcements indicate the government’s intention to give legislative effect to some extra statutory concessions, and ESC C16 is one of the likely targets. Fears are now mounting that the government will take the opportunity to tidy-up this apparent anomaly.
There are rumours that the £4,000 monetary limit will be retained, but be utilised in a far broader way. It would not be difficult to imagine the government retaining the concession for the very smallest of companies only by allowing capital treatment where the share capital and reserves fall below this figure but insisting on a formal winding-up or making distributions subject to income tax for “larger” companies with net assets above this figure.
So if you are thinking of taking advantage of the current concession there is no time to lose as the opportunity may close as early as Budget day on 23 March.
Four thousand pounds is hardly a king’s ransom and this figure might increase. But in a world where someone earning £8,500 is still referred to as a “higher-paid” employee, I wouldn’t bet on it.
Andy White is a tax partner at accountancy firm CBW. He can be contacted at andy.white[at]cbw.co.uk, or on Tel: 020 7309 3800.
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