As foreshadowed in the Autumn Statement (7 December 2011), and despite extensive lobbying since on behalf of the small business community, winding up of companies from 1 March 2012 to achieve a satisfactory tax profile for shareholders will in many cases become more complex and expensive. It is thus disappointing that, against its stated ambitions to reduce red tape, H M Government have enacted (on 30 January 2012) a longstanding extra statutory concession in a manner designed to inhibit, rather than prevent, an abuse that is more imagined than real.
Once a company’s assets have been realised and its liabilities settled, the concession (ESC C16) has hitherto enabled accumulated reserves (along with share capital) to be distributed to shareholders, shortly in advance of the simple process of applying for striking off, with the amounts they receive treated for tax purposes as capital receipts rather than dividend income. This has required HMRC written approval, normally granted in straightforward cases.
The new enactment allows the concessionary basis effectively to continue but only where the total of distributions does not exceed £25,000 and winding up is completed within two years. This de minimis limit is only a slight improvement on that originally envisaged of £4,000 (matching the level below which government would find claiming the assets of “abandoned” companies uneconomic).
However, for most (larger) companies and irrespective of any anticipated abuse, capital treatment can still be achieved but with costs (and some delay) involved in the formal appointment of a liquidator expected to be around £7,500 or more.
Whether capital treatment is actually beneficial will depend on the particular circumstances of each shareholder. While the main CGT rate is 28%, for those individuals able to claim entrepreneurs’ relief the rate is instead 10%. The comparable effective income tax rates under dividend treatment are: nil (basic rate taxpayers), 25% (40% income band) and 36.1% (income above £150,000).
Those nonetheless wishing to act before 1 March 2012 should note that HMRC has confirmed that: “as long as you have written to HMRC and provided the required assurances and you make the distribution in February then the fact that you have not heard back from HMRC before doing so does not matter. You still come under ESC C16 and pay CGT.”
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