Earlier this week, HM Revenue & Customs published a further Technical Consultation on draft legislation to enshrine published but 'discretionary' concessions (tax treatments) into law, as part of a comprehensive review following the Wilkinson case.
Although most of the concessions dealt with in this Consultation are of limited scope, ESC C16, which allows distributions from a company to be treated as capital, rather than income, will be of interest to many tax advisers and business owners alike.
It is one of the most frequently used concessions and can have significant benefits: broadly, where a company is being 'wound up' and has surplus funds to pay out to its shareholders, the distribution is treated as income to the shareholders in accordance with the legislation, unless a liquidator is appointed but ESC C16 allows the shareholders to treat the payments as capital, without having to go to the trouble or cost of a liquidator.
The capital route can be advantageous, particularly where Entrepreneurs' Relief is also available.
As Mark McLaughlin has pointed out in the past, [ see Turning Extra Statutory Concession C16 into Law and, more recently, No ESCape? ], HMRC has had some issues with this concession. Draft legislation has now been published, but one clause limits the application of the replacement legislation, to situations where the total funds for distribution do not exceed £4,000 whereas previously, there was no limit.
The limit appears to be so as to tie in with the policy of the Treasury Solicitor's Office, as regards 'bona vacantia'. Simply put, in many cases the Crown may have the right to the company's assets under the 'bona vacantia' rules but as a policy, the Treasury Solicitor's Office will not pursue amounts below £4,000 so that a company with limited funds may avoid the costs of a formal liquidation.
However, as HMRC well knows, restricting ESC C16 into line with this £4,000 limit will result in a severe limitation on its use going forwards - in practice, much larger amounts have been distributed under the concession in the past.
It is expected that this draft legislation will comprise part of the 2011 Budget so interested parties will have to move quickly, if they wish to respond to the consultation. It would not be surprising to find that there is considerable resistance to the £4,000 threshold but there are possible alternative routes, such as formal liquidation, and even deliberately making the company 'unlimited'. Whilst the cost of a formal liquidation may not be insignificant, it may help to secure much larger tax savings, if comparing a possible 50% marginal Income Tax rate, against 28% Capital Gains Tax - or even as low as 10% with the benefit of Entrepreneurs' Relief.
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Hi Liz,<br /> <br /> My understanding is as follows: ignoring a 'formal winding up', the legislation provides that a distribution is to be treated as income except to the extent that it relates to a distribution of share capital. It is HMRC's previously 'relaxed' approach to what it has accepted as a distribution of share capital in the past, including accumulated profits, as against the proposed cap now. <br /> <br /> If you look at CTM36205 et seq., you will see that HMRC's manuals currently make no distinction as to the various 'types' of capital on hand, from which a distribution might be made; simply that it may be treated as if on a formal winding up and therefore be treated as capital in nature. <br /> <br /> If you look at the draft legislation and in particular the explanatory notes at <br /> <br /> http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_030872<br /> <br /> which I interpret that HMRC is capping the 'concession' at £4,000, whereas in the past, it could potentially have been significantly more generous.<br /> <br /> Regards,<br /> <br /> Lee
As I understood it, the bona vacantia limit of £4,000 applied to share capital not to total assets and so if the Revenue really intend what this article says it is an undue restriction on a useful concession and should be resisted strenuously.