Mark McLaughlin

Introduction

Many companies in general, and owner-managed businesses in particular, tend to outlive their usefulness sooner or later, and are eventually liquidated and struck off the company register. For tax purposes, distributions of surplus profits to shareholders during a liquidation are normally treated as a return of capital, which in the case of individual shareholders is subject to capital gains tax (CGT). This treatment can often (but not always) be more beneficial than if the distribution was liable to income tax in a similar way to a dividend. This is normally due to the potential availability of taper relief and the annual CGT exemption.

However, liquidations can be fairly costly, and in some cases the amount of distributable profits may be relatively small. By concession, HM Revenue & Customs (HMRC) will treat distributions to shareholders of companies which are wound up informally (as opposed to a formal liquidation) as capital receipts, if certain conditions are satisfied.

This HMRC concession (number C16) is the subject of the following query, from 'jel117':

Query from TaxationWeb visitor ('jel117')

Once a company has been wound up via the C16 mechanism, the cash is extracted from the company into the shareholders own names.

Which date do you take as being the date the disposal takes place? The date the company ceased, or the date the cash physically went to the shareholders?

If the cash was paid in small chuncks, which straddled two tax years, would this be more beneficial as this would utilise two years annual exemptions?

Editor’s Comments

The first point to note about Concession C16 is that an application must be made to HMRC for the Concession to be available. There are a number of conditions to be satisfied for the Concession to apply. The text of COncession C16 is reproduced below (the following is reproduced under Crown Copyright):

C16     Dissolution of companies under the Companies Act 1985 ss 652, 652A: distributions to shareholders

A distribution of assets to its shareholders by a company which is then dissolved under the Companies Act 1985 s 652 or s 652A (or any comparable provisions) is strictly an income distribution within TA 1988 s 209. In most circumstances and providing that certain assurances are given to the inspector before the event, the Revenue is prepared for tax purposes to regard the distribution as having been made under a formal winding-up so that the proviso to s 209(1) applies. The value of the distribution is then treated as capital receipts of the shareholders for the purpose of calculating any chargeable gains arising to them on the disposal of their shares in the company.

The assurances include—

The company

• does not intend to trade or carry on business in future; and
• intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
• intends to seek or accept striking off and dissolution.
  

The company and its shareholders agree that

• they will supply such information as is necessary to determine, and will pay, any corporation tax liability on income or capital gains; and
• the shareholders will pay any capital gains tax liability (or corporation tax in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made during a winding-up.

Of course, there are issues of both tax and company law involved when winding up a company. Concession C16 is just one consideration in the process. Professional advice is strongly recommended.

Forum responses included those reproduced below.

Simon Sweetman commented:

The disposal is at the date of winding up, so paying out the cash by inches would not help. Do note that there are recently revealed problems with the C16 approach (to do with bona vacantia) if the assets are more than £4000 - the Treasury solicitor can claim the money.

'Jel117' replied:

So if the final company accounts were made up to 31 Jan 07 but the cash wasn't transffered from the company account to the individuals until Mar 07, I would still take Jan 07 as the date of diposal?

'wamstax' commented:

Surely the whole point about C16 is that the assets and monies are extracted from the company BEFORE it is struck off so that bona vacantia should not be an issue. Granted if you strike the company off before stripping its assets out then the assets properly are claimable by the Crown, however this has always been the case from as far back as I can remember ..... and yes I am old enough to recall post war credits.

Your example given would give rise in fact to a distribution in March 2007 and would be properly distributable as long as you had not allowed the company to be struck off at that point.

Brian Clarke commented:

The C16 mechanism allows the Revenue to confirm that, if you extract money (and assets) now - ie after the date of their letter - then that will be treated by them as a capital distribution, not an income distribution - dividend.

A capital distribution is taxed as a capital gain, whereas dividends of course are income.

The date when the cash is extracted is a simple question of fact, decided by the date on the bank statement. If that date is after the date of the Revenue's letter, then you're OK.

So the trick is to do everything in the right order:

1) Get the C16 clearance letter from the Revenue, then
2) Extract the assets and close the bank account, then
3) Get the company struck off.

As part of the C16 procedure, you have to confirm various things to the Revenue, one of which is that the directors will close the company promptly after the C16 confirmation is given. So you can't hang around for a couple of years drip-feeding the assets to the shareholders.

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Article Added Saturday, 13 October 2007 | 4546 Hits

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