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BKL Tax reviews the changes for tax treatment of distributions on "winding up" a company.

Tax Concession can Reduce Tax Bill

Many readers will be familiar with Extra-Statutory Concession C16 - often referred to as the "informal liquidation" route. This provides that (provided advance assurances are given to HMRC, none of them very onerous) distributions made from a company in advance of striking-off may be treated as capital rather than income, potentially opening the door to an Entrepreneurs' Relief rate of CGT of just 10% in place of Income Tax treatment at rates of up to 36.11%.

Company Law Implications

Most readers will recall that a fly in the ointment has been that regardless of what ESC C16 provides, company law prohibits distributions of share capital. And if, following an unlawful distribution of share capital, a company is struck off, the Treasury Solicitor can in principle recover the amount of the unlawful distribution under the rules of "bona vacantia".

Practical Treatment

Hitherto the Treasury Solicitor had dealt with this absurdity by way of a published concession stating that the Crown would not seek to recover such technically illegal distributions where the amount of share capital and premium involved was less than £4,000. But because Companies Act 2006 made it relatively straight-forward for a company to reduce its share capital and distribute it lawfully, the Treasury Solicitor announced that the concession was to be withdrawn with effect from 14 October 2011.

But what does "withdrawn" mean? Several commentators have warned that "withdrawal" meant that from 14 October there would be no de minimis limit and that ALL unlawful share capital repayments would be at risk. In fact, quite the opposite is true: the £4,000 limit was simply removed and the Treasury Solicitor has confirmed that they will not seek to recover ANY amount of share capital distributed in contemplation of strike-off. A happy ending indeed.

Legislating the Concession

The concession is to be replaced by a statutory provision but with a final sting in the tail. The original draft legislation proposed that it be limited to cases where the total assets were less than £4,000, thereby aligning its usefulness firmly with chocolate teapots. Following "consultation" the cap has been uplifted to £25,000. Why is any cap at all needed when the existing ESC has none? Apparently "to avoid the need for complex anti-avoidance legislation". But since the enacted ESC will in any event remain subject to the "transactions in securities" legislation at ITA 2007 s 682 et seq which would catch any attempted shenanigans, the logic for a financial cap to protect the Exchequer escapes us. But there we are.

One point of clarification though: there seems to be a common misunderstanding that following the change it will not be possible to extract more than £25,000 as capital gain on closure of a company and that any excess will inevitably be charged as income. This is not the case at all. Any and all amounts distributed following appointment of a liquidator will remain capital: all that is changing is that if assets exceed £25,000 it will henceforth be necessary to incur the (not insubstantial) cost of a formal liquidation if capital treatment is to be secured.

The amended draft legislation will be laid before Parliament early in 2012. HMRC will make a further announcement to advise when the legislation will come into effect. Best advice is to get rid of those redundant companies soon: as if you had nothing better to do in the next month or two...