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Capital Tax Review by Matthew Hutton MA, CTA (fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on current Treasury practice as it effects the informal winding up of companies.

Context

When a company is struck off owning property (which term includes rights of any kind), that property vests in the Crown as ‘bona vacantia’.

From time to time the question surfaces how this affects companies that have been struck off following distribution of assets pursuant to ESC C16.

Illustration

For example: your client company has assets of £20,000 represented by share capital of £1,000 and distributable reserves of £19,000. You apply and obtain agreement that ESC C16 will apply. You pay out the £20,000 to the shareholders and the company is struck off. Since the company has not in fact been wound up, the distribution of £1,000 is technically unauthorised. As such it is normally recoverable by the company. Any right to recover that amount is property of the company that passes to the Crown when the company is struck off. Will the Crown seek to recover the £1,000? And is the position different if the amount of the unauthorised distribution is £20,000? Or £100,000?

The current Treasury View

The Office of the Treasury Solicitor has confirmed (and will, it is understood, be publishing in due course appropriate guidelines on its website www.bonavacantia.gov.uk ) that a concession does operate in this area. But it is a limited one. Where a company has been struck off under Companies Act 1985 s 652 or s 652A and the shareholders have taken advantage of ESC C16, the Treasury Solicitor will waive the right to recover any unauthorised distribution of the kind described above provided the amount of the unauthorised distribution is less than £4,000.

Avoiding bona vacantia problems

It would therefore follow that where the amount of capital (which would include share capital, share premium and any non-distributable reserves) exceeds £4,000, then to avoid the bona vacantia difficulty there may be three possibilities:

1. Abjure ESC C16 and appoint a liquidator under a formal winding-up; or (possibly)

2. If ESC C16 applies, keep the amount of the ‘unauthorised distribution’ below £4,000, if necessary by leaving property in the company. Obviously one will want to do this only if the value of assets sacrificed in this way is less that cost of engaging a liquidator.

3. Consider whether using ESC C16 in conjunction with the provisions at Companies Act 1985 s171 permitting a payment out of capital may be worth using.

If any reader finds it bizarre that utilising a concession promoted by one government department can result in a substantial claim from another government department, he or she is not alone...

(Berg Kaprow Lewis LLP News Release 29.8.06)

Comment

This is an interesting piece of news which I had not previously seen publicised.

Matthew Hutton MA, CTA (fellow), AIIT, TEP
September 2006

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.