PHILIP A BECK
Chartered Accountant
Licensed Insolvency Practitioner
41 Kingston Street, Cambridge CB1 2NU
Tel: 0800 1953605 (Free call) or 01223 367022
Fax: 0844 5048737 email: pbeck@ntlworld.com
What was Extra-Statutory
Concession C16 and how does its replacement (Section 1030A Corporation Tax Act
2010) work?
Extra-Statutory
Concession (ESC) C16 was a concession granted by HM Revenue & Customs, that allowed
the directors of a company to effectively wind up a solvent company themselves
without appointing a liquidator and pass the surplus funds to the shareholders
as capital receipts rather than dividends. This had the dual benefits of a
likely lower tax charge on the shareholders (capital gains tax rather than
income tax, especially if Entrepreneurs Relief applied), and also avoiding the costs of appointing a liquidator.
In 2005 the House of Lords determined that
HMRC's discretion to offer ESCs was limited, and as a result ESCs have on an
ongoing basis either been scrapped or incorporated into legislation. On 1
March 2012 the Enactment of Extra-Statutory Concessions Order 2012 came into
force putting ESC C16 onto a legislative, if restrictive, basis. Article
16 of the Order inserts Sections 1030A and 1030B into the Corporation Tax Act
2010. What this means is that "ESC C16" relief is no longer a concession
that needs to be applied for, it is automatic under the new legislation, with a
£25,000 cap on the total amount that can be distributed in anticipation of
company dissolution for capital, rather than income, treatment of distributions,
to be applied. The new legislation is not without problems of
interpretation though, as explained below.
The wording of these two new sections is as follows:
Distributions prior to
dissolution of company
1030A Distributions in
respect of share capital prior to dissolution of company
(1) This section applies
where - (a) the procedure in Section 1000 of the Companies Act 2006 (power to
strike off company not carrying on business or in operation) has been commenced
in relation to a company, and (b) the company makes a distribution in respect of
share capital in anticipation of its dissolution under that section.
(2) This section also applies where - (a) a company intends to make, or has
made, an application under Section 1003 of that Act (striking off on application
by company), and (b) the company makes a distribution in respect of share
capital in anticipation of its dissolution under that section.
(3) The distribution is not a distribution of a company for the purposes of the
Corporation Tax Acts if conditions A and B are met (but see Section 1030B).
(4) Condition A is that, at the time of the distribution, the company - (a)
intends to secure, or has secured, the payment of any sums due to the company,
and (b) intends to satisfy, or has satisfied, any debts or liabilities of the
company.
(5) Condition B is that - (a) the amount of the distribution, or (b) in a case
where the company makes more than one distribution falling within subsection (1)
(b) or (2) (b), the total amount of the distributions, does not exceed £25,000.
(6) In the case of a company incorporated in a territory outside the United
Kingdom, any reference in subsection (1) or (2) to a section of the Companies
Act 2006 is to be read as a reference to any provision of the law of that
territory corresponding to that section.
1030B Section 1030A:
effect of company not being dissolved, etc
(1) Where this section
applies, a distribution made by a company is to be treated for the purposes of
the Corporation Tax Acts as if Section 1030A (3) had never applied to it.
(2) This section applies where 2 years have passed since the making of the
distribution and - (a) the company has not been dissolved during that time, or
(b) the company has failed - (i) to secure, so far as is reasonably practicable,
the payment of all sums due to the company, or (ii) to satisfy all of its debts
and liabilities.
(3) In a case where this section applies, all such adjustments as are required
in order to give effect to subsection (1) are to be made, whether by the making
of assessments or otherwise.
Reading the wording
carefully, one can see that distributions made in
anticipation of dissolution of the company will not count as
"distributions" i.e. dividends subject to dividend tax, if
the total amount of the distributions does not exceed
£25,000. The moment that distributions under this
section exceed £25,000, all of the distributions will
count as dividends, leading to an additional tax liability
for higher-rate taxpayers. What if, though, a company
distributed all but £25,000 as ordinary dividends, then
applied to Companies House for dissolution, and
distributed the remaining £25,000 as capital receipts under
this new section ? HMRC could argue that the intent
to make an application under subsection 2 of Section 1030A
to strike off the company pre-dated the actual application
to dissolve the company, therefore the amount of any prior
dividends should be taken into account when determining
whether the £25,000 limit has been breached. This will
no doubt lead to many questions of intent being resolved in
the Tribunal. While HMRC could reasonably expect to
allow dividends paid from trading profits of a going concern
business not to be counted towards the £25,000 limit, if a
company were to sell its fixed assets, remaining stock and
goodwill such that it was left with only cash in the Bank
prior to application for dissolution, it's pretty obvious
that intent would be inferred as having existed at least
from the date of sale irrespective of the actual date of
application for striking off. Also, in the event of a
company having surplus cash not needed for day-to-day
trading requirements i.e. accumulated profits having simply
been left in the company, HMRC would probably view the
distribution of surplus cash as counting towards the £25,000
limit. Each case would need to be determined on its
own facts.
Another issue is for
companies that applied for ESC C16 clearance before 1
March 2012, but have not started or only partially completed
their distributions by 1 March 2012. While it is clear
that a company commencing its distributions wholly after 1
March 2012 will fall entirely under the new rules, it is not yet
clear what will happen if there are multiple
distributions straddling that date, for instance a company
distributing £20,000 under ESC C16 in February 2012, and a further £20,000
under the new rules in March 2012. In
This
article , The Institute of Chartered Accountants in
England and Wales states that they have taken informal legal
advice suggesting that pre 1 March 2012 distributions should
not count towards the £25,000 limit, yet HMRC takes the
opposite view.
It can be seen that
the replacement for ESC C16 has created its own
uncertainties which will take time to resolve. The
safe way to ensure capital treatment of distributions
without limit is for
the company to be placed into Members' Voluntary
Liquidation. It is expected that for shareholders who
are higher-rate taxpayers and who would therefore have an
additional dividend tax liability to pay, it will be tax
advantageous for any company not falling within the £25,000
limit above to be placed into Members' Voluntary
Liquidation.
Philip Beck is a Licensed Insolvency Practitioner operating since 1996 with
substantial experience in undertaking cost-effective liquidations, both solvent and insolvent.
A members' voluntary liquidation can be undertaken for a
fee as low as £2,000 +
disbursements of a few hundred pounds. Multiple liquidations of group
companies with common directors and shareholders can be undertaken for a fee
from £1,500 per company + disbursements.
Please note that this site deals only with company and tax law in the United Kingdom of Great Britain and Northern Ireland. It is not applicable to other jurisdictions.
