HM Revenue & Customs (HMRC) is intending to place a restriction on the amount of a company's assets that can be distributed as capital prior to it being struck off the Companies Register.
When the relevant conditions are met, a company can apply to HMRC under Extra Statutory Concession (ESC) C16 in order to request that distributions made ahead of the company being informally struck off the Companies Register are treated as if they are a return of share capital under a formal winding up.
The purpose of this measure is to save small companies the expense of appointing a liquidator. Distributions made to shareholders by a liquidator during the course of winding up are given capital treatment.
HMRC published a consultation on legislating ESCs, including C16 in December. It is proposing to introduce a new section into the 2010 Corporation Tax Act a summary of the measures is as follows:
- A distribution of up to £4,000 made in respect of share capital in anticipation of the dissolution of the company will be not be treated as an income distribution.
- Certain qualifying conditions with regard to solvency and payment of debts will have to be satisfied to afford this treatment.
- If distributions are in excess of £4,000 the only way thereafter to achieve capital treatment will be by appointing a liquidator.
The £4,000 de minimis appears to be the estimated cost of appointing a liquidator - a figure set in the 1980s by the Treasury Solicitor. This figure is the amount below which the Crown will not pursue companies for Bona Vacantia.
Given that the tax difference between extracting a company's assets on cessation as capital compared to extracting them as a distribution is now so great, HMRC's proposed changes will greatly add to the cost of striking off many companies. Most companies wishing to distribute reserves (distributable or not) will now be required to appoint a liquidator in order to claim CGT treatment and Entrepreneur's Relief, as available on the distribution.
It is difficult to see the point of these proposals. HMRC is clearly not trying to legislate ESC C16, it is trying to legislate for the Treasury's concession on bona vacantia instead. Whether this is a "wopping howler" or a Government policy intention is unclear, as following the 2006 Companies Act, bona vacantia is largely surplus to requirements. Most companies with undistributable reserves can now convert them into distributable reserves under a capital reduction process.
So why change ESC C16? The proposals appear to raise £nil in tax, stand to cost most people an additional £6,000 to £10,000 (our estimate of the average cost in 2010 of appointing a liquidator to wind up a very small company), and add another layer of complexity to the business of running a company.
A neater solution would surely be to legislate ESC C16 as now but with a formal clearance procedure under the Transactions in securities. This would enable HMRC to counteract a tax advantage in cases where it is felt that a striking off or winding up is being used for the purposes of "tax alchemy" (the conversion of income into capital). That might also sort out "the wood from the trees" and at the same time bring much needed clarification when, or if indeed, liquidation can amount to a transaction in securities.