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Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP, General Editor of TaxationWeb, considers the ‘transactions in securities’ and ‘bona vacantia’ provisions on the dissolution of family and owner-managed companies.Many practitioners will have client companies approaching the end of their useful existence. The initial reaction might be to appoint a liquidator. However, a possible alternative to the potential expense of a formal liquidation is for the business owners to undertake an informal winding up and to seek the application of Extra Statutory Concession C16 (‘Dissolution of companies under the Companies Act 1985, ss 652, 652A: distributions to shareholders’).

Practitioners will no doubt be familiar with the above Concession, which allows a company’s dissolution under Companies Act 1985, sections 652 and 652A (or comparative provisions) to be treated as a formal winding up for tax purposes. Some practical issues involving winding up family or owner-managed companies are considered below.

Transactions in Securities

Capital distributions by companies to shareholders during a winding up under Concession C16 (or indeed a formal liquidation) are not treated as income payments, but as full or part disposals for the purposes of capital gains tax or corporation tax on chargeable gains (TCGA 1992, s 122(1)). However, this tax treatment is subject to anti-avoidance legislation aimed at the cancellation of a ‘tax advantage’ obtained through transactions in securities (TA 1988, ss 703-709). Capital receipts caught by this legislation are subject to income tax instead.

HMRC do not regard the ‘ordinary’ liquidation of a company as constituting a ‘transaction in securities’ within TA 1988, s 703, if it involves the genuine winding-up of a company where the business ceases or is taken over and the new owners are unconnected with the previous ones. However, if the business is transferred to substantially the same owners as before, HMRC are likely to challenge the winding up as involving a transaction in securities, unless the business is transferred as part of a genuine company reconstruction within TCGA 1992, ss 136 and 139, and by applying Insolvency Act 1986, s 110.

An application to HMRC for an informal winding up under Concession C16 does not cover transactions in securities. However, the Company Taxation Manual indicates that HMRC will consider whether TA 1988, s 703 applies when considering applications under Concession C16 (paragraph 36850). For cases in which section 703 could apply, an application for clearance in advance under TA 1988, s 707 should be made to HMRC’s Business Tax Clearance Team. If the taxpayer can show that the winding up is being carried out for bona fide commercial reasons and that obtaining a tax advantage was not one of the main purposes, section 703 will not apply. Full disclosure is required for an HMRC clearance to be relied upon.

Concession C16 specifies certain qualifying conditions to be satisfied by the company and its shareholders for capital treatment to apply to distributions. In addition, the Company Taxation Manual indicates two further conditions to be satisfied (paragraph 36220). The first condition is that ‘The company is not one which, if the distributions were made on a winding up, would be reported…in respect of Section 703 ICTA 1988 under sub-paragraphs (e) or (f) of CTM 36875’. No such sub-paragraphs exist, but the corresponding numbered sub-paragraphs 5 and 6 in CTM 36875 indicate that the following circumstances could cause problems for the purposes of both Concession C16 and Section 703:

• a company sale or transfer of its assets or business to another company with (some or all) common shareholders, followed by the liquidation of the transferring company or the sale of shares in either company;

• the receipt of capital by shareholders of a company (or group) following a demerger or reconstruction from the sale or liquidation of one company, where the shareholders retain an interest via another company involved in the transactions.

The second condition is that the company is not the subject of an investigation, either directly or indirectly (e.g. in respect of a director shareholder).

Whilst the above conditions are not published in Concession C16, paragraph CTM 36220 does provide some reassurance that the concession is not necessarily refused because not all the conditions are met. HMRC Officers are instructed to refer the case to a technical division.

Bona Vacantia (England & Wales)

Practitioners should ensure if possible that the business owners extract the company’s assets before dissolution and striking off. When a company is dissolved, any remaining assets strictly pass to the Crown (Companies Act 1985, s 654). This rule is known as ‘bona vacantia’. If the dissolved company’s registered office was in England or Wales (other than the Duchies of Lancaster or Cornwall), the Treasury Solicitor is the Crown’s nominee for dealing with bona vacantia assets.

A company cannot normally make a distribution except out of profits available for distribution (Companies Act 1985, s 263), and therefore cannot distribute its share capital when it is struck off under Companies Act 1985, ss 652 or 652A. However, the Crown can disclaim its right to bona vacantia assets (Companies Act 1985, s 656). By concession, if the shareholders have taken advantage of Concession C16 and the company has been struck off under sections 652 or 652A, the Treasury Solicitor’s Office will waive the right to recover an unauthorised distribution of share capital amounting to less than £4,000 (BKL Tax Press Release 21 August 2006).

This concession will be good news for many small family and owner-managed companies. However, for companies with substantial share capital (and any non-distributable reserves), a formal liquidation may need to be considered. Business owners will no doubt compare the cost of leaving capital of £4,000 in the company with the cost of engaging a liquidator. A possible alternative to formal liquidation may be to consider an informal winding up together with permitted payments out of capital falling within Companies Act 1985, s 171. A further alternative might be to re-register the company as an unlimited company (Companies Act 1985, s 49). An unlimited private company can usually repay its share capital, although the protection of limited liability is then lost.

Further information on bona vacantia can be obtained from the Treasury Solicitor’s Department website (www.bonavacantia.gov.uk).

Mark McLaughlin CTA (Fellow) ATT TEP
November 2006

The above article is taken from ‘Busy Practitioner’, a monthly journal from Tottel Publishing. To order a subscription to ‘Busy Practitioner’, click here