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Many readers will be aware that Extra-Statutory Concession C16 has for several years allowed distributions prior to a company's dissolution (commonly referred to as 'distributions on a "winding up"') to be treated as capital receipts in the hands of the company's shareholders, rather than income. 

This special treatment is generally more favourable - particularly in circumstances where the shareholder is in a position to claim Entrepreneurs' Relief or similar - as the tax saving can be as much as 40%. (i.e., from the Additional Rate of Income Tax of 50%, to 10% Capital Gains Tax for gains eligible for Entrepreneurs' Relief). 

Many readers will also be aware that ESC C16 will be abolished from 1 March onwards and effectively replaced by statute. The replacement statutory provision restricts the total amount of distributions that may rank as capital to just £25,000.

One would normally apply for ESC C16 to be granted before making distributions and this can take several weeks. HMRC is also suffering from a backlog of applications, from companies / agents wishing to utilise the potentially far more generous Concession before it lapses.

According to the ICAEW, HMRC has therefore allowed that:

Provided the distributions have been made in the correct manner, the usual conditions for ESC C16 are in place, and the C16 application has been lodged with HMRC before 1 March, then treatment as a capital distribution may still be granted. For details of the conditions, see CTM36220 - Particular Topics  - Company Dissolution: Distributions Treated as Being Made on Formal Winding Up

Quoting HMRC's response to the ICAEW in Dissolution of Companies - ESC C16:

‘[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.’

One final point to beware is that HMRC is still saying that the £25,000 threshold applies to the aggregate of distributions made before and after 1 March 2012. (Although this is contested by the ICAEW and CIOT - see ESC C16 Dissolutions Warning). HMRC may be wrong but it may be preferable to ensure that all distributions are made before 1 March, so that the new statutory provisions cannot be triggered, and any concern that they might 'look back' to pre-1 March distributions can be avoided.

From 1 March 2012, it may be necessary to commence formal liquidation proceedings and appoint a liquidator, in order for distributions to be treated as capital in nature.