Winding up concessions go

HMRC's concession for companies closing down is to go - probably in April 2012.
The Treasury Solicitor's Department (TSD) has just abolished their equivalent concession from October 14, 2011. Does this mean higher tax bills for shareholders?


Tax efficient wind up When you want to close down your company, you will want to do it in the most tax-efficient way. Both HMRC and TSD have parts to play in achieving this but if you don't stick to their rules you could end up with a big tax bill or even lose the company's assets to the Crown.


Tax Concession Unless a company is formally liquidated any cash or assets it passes to its shareholders in the closure are taxable as income at the taxpayer's highest rate.


HMRC's Extra Statutory Concession C16 (ESC C16) says the transfer may be treated as a capital payment liable to capital gains tax (if at all) at rates of between 10% and 20%.


ESC 16 is due to be withdrawn next April and replaced by a less generous law.


In the meantime it can save shareholders substantial amounts of tax.


TSD Concession Until 14 October 2011, TSD had a similar concession. By law, if assets are distributed and the company subsequently struck off without a formal liquidation, the assets become Crown property. This is known as bona vacantia.


The TSD concession said bona vacantia did not apply where the company's share capital was less than £4,000.


However, there is an alternative under the Companies Act 2006 wherby you can, for example, transfer the company's share capital and reserves (accumulated profit) leaving just £1's worth. It is this remaining £1 which is at risk of becoming bona vacantia if a formal liquidation is not carried out. However, this procedure may cause trouble with ESC   C16.


Tax concession also ending Although ESC C16 is not likely to be revoked until April 2012, the removal of the TSD concession could pose a tax problem for any company intending to close down without a formal liquidation.


Usual method A company using ESC C16 must ask HMRC to agree that transfers of its assets to shareholders before the company is struck off can be treated as capital payments. The company can then distribute its assets whilst leaving its share capital intact. To stop the bona vacantia problem, the company must first use the Companies Act 2006 procedure to reduce its share capital. ESC C16 does not apply to this type of distribution but only to a "distribution of assets" , not share capital. An awkward inspector  might take this point in an attempt to deny relief under ESC C16. It is advisable, therefore, to explain to HMRC that the reduction of share capital is simply part of the process of closing down the company before strike-off and therefore should be covered by the concession.

Companies Act 2006 Procedure The first step is for the company to pass a special resolution; this needs agreement from 75% of the shareholders. In addition the directors will need to provide a solvency statement. This requires each of them to confirm that there's no reason why the company can't meet its debts and that it will be able to pay them as they fall due within twelve months of the statement. The statement must:

• be in writing
• show the date it’s made
• state that the company’s solvency statement is made in accordance with s.642 of the Companies Act 2006
• contain the name of each director, and be signed by each of them.

The resolution and the solvency statement must then be sent to Companies House within 15 days of being passed, together with a statement of capital showing how the share capital has been reduced.

You can find more information on the procedure for making company resolutions here:

http://www.companieshouse.gov.uk/about/gbhtml/gp3.shtml

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HMRC have now published a draft of the legislation which will replace ESC 16

Distributions in respect of share capital prior to dissolution of company: corporation tax

16.—(1) In Part 23 of the Corporation Tax Act 2010(1) (company distributions), Chapter 3 (matters which are not distributions) is amended as follows.

(2) In section 1029(1) (overview of Chapter), after paragraph (a) insert—

“(aa)section 1030A (distributions in respect of share capital

prior to dissolution of company),”.

(3) After section 1030 insert—

“Distributions prior to dissolution of company

1030A    Distributions in respect of share capital prior to dissolution of company

(1) This section applies where—

(a)the procedure in section 1000 of the Companies Act

2006 (2) (power to strike off company not carrying

on business 

or in operation) has been commenced in relation to a 

company, and

(b)the company makes a distribution in respect of share  

capital in anticipation of its dissolution under that section.

(2) This section also applies where—

(a)a company intends to make, or has made, an application

under section 1003 of that Act (striking off on application

by company), and

(b)the company makes a distribution in respect of share

capital in anticipation of its dissolution under that section.

(3) The distribution is not a distribution of a company for the purposes of the Corporation Tax Acts if conditions A and B are met (but see section 1030B).

(4) Condition A is that, at the time of the distribution, the company—

(a)intends to secure, or has secured, the payment of any

sums due to the company, and

(b)intends to satisfy, or has satisfied, any debts or liabilities

of the company.

(5) Condition B is that—

(a)the amount of the distribution, or

(b)in a case where the company makes more than one

distribution falling within subsection (1)(b) or (2)(b),

the total amount of the distributions, does not exceed 

£25,000.

(6) In the case of a company incorporated in a territory outside the United Kingdom, any reference in subsection (1) or (2) to a section of the Companies Act 2006 is to be read as a reference to any provision of the law of that territory corresponding to that section.

1030B    Section 1030A: effect of company not being dissolved, etc

(1) Where this section applies, a distribution made by a company is to be treated for the purposes of the Corporation Tax Acts as if section 1030A(3) had never applied to it.

(2) This section applies where 2 years have passed since the making of the distribution and—

(a)the company has not been dissolved during that time, or

(b)the company has failed—

(i)to secure, so far as is reasonably practicable, the

payment of all sums due to the company, or

(ii)to satisfy all of its debts and liabilities.

(3) In a case where this section applies, all such adjustments as are required in order to give effect to subsection (1) are to be made, whether by the making of assessments or otherwise.

2010 c. 4The above Statutory Instrument was approved by the First Delegated Legislation Committee on Monday 30 January which means that distributions which made on or after 1 March 2012 in anticipation of a dissolution and which exceed £25,000 will be subject to income tax and not capital gains tax.

The way to preserve capital gains tax treatment will then be to enter a formal liquidation which may be a rather expensive exercise.

FromIIIt is clear that there are a lot of people trying to beat the 1 March deadline and dissolve companies under the ESC C16 rules.

There is no limit, or cap, on the amount of the distribution that can be made under ESC C16 and be subject to CGT.

Making the distribution before 1 March

HMRC has stated that as long as you have written to HMRC and provided the required assurances and you make the distribution in February then the fact that you have not heard back from HMRC before doing so does not matter. You still come under ESC C16 and pay CGT.

‘[In relation to] applications made but not finalised before 1 March, [HMRC] can confirm that it would not take a point on the absence of a response by HMRC provided that all the conditions attaching to the current ESC are met. If the distribution is made in February, the distribution can be treated as capital receipts in the hands of the shareholders and the £25,000 ceiling does not apply.’

If all the company assets are not yet in cash then it should be possible to make a distribution in specie and come within ESC C16. If the affairs of the company are complicated then you may need to take appropriate legal advice to make sure that what you are proposing to do would be treated as a distribution, if challenged, and that you will have complied with all the assurances you need to give under ESC C16.

If you cannot make the full distribution before 1 March but need to make one distribution before that date and distribute the rest of the company assets afterwards then beware. The current view of HMRC is that for the purpose of determining whether the post 1 March distributions exceed the £25,000 limit, and are liable to income tax, you have to take into account any interim distributions made before that date.

We do not believe that the HMRC analysis is correct. Article 18 of the Statutory Instrument (SI) states the new rules will only have effect in relation to distributions made on or after 1 March. So it is not clear to us how you can take pre March distributions into account when determining whether you have breached the £25,000 cap on March and subsequent distributions. 

 If you make a distribution under the new regime which of itself is less than £25,000 but which, together with earlier relevant distributions, exceeds £25,000 you will have to make up your mind as to whether to return that subsequent distributions as liable to capital gains or income tax.

A future tax return filing problem

The general aggregation principle could also present a bit of a problem when you are filing tax returns under the new regime. Suppose you make a distribution in March 2013 of less than £25,000 but the distribution together with a subsequent final distribution come in total to more than £25,000. This means that all the distributions are liable to income tax. If the second distribution is not made until after the tax return covering the first distribution is filed you will have filed on the basis that that first distribution was liable to CGT but it will subsequently become liable to income tax because of the second distribution.

The new regime

The relevant statutory provisions governing the new regime which appear in the SI insert two new sections, 1030A and 1030B, into Corporation Tax Act 2010. One obvious danger in the new regime is that if the dissolution is delayed more than two years after the distribution or there is a similar delay in settling all the debts and liabilities then income tax will be applied to the distribution even though it was for an amount less than £25,000. Again you are going to have tax return filing problems.

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