Consultation on enacting another batch of HMRC's Extra Statutory Concessions (ESCs) ended on March 8th 2011. This last round included ESC C16 (striking off a company).
HMRC has proposed significant changes to curtail the use of ESC C16 however, it has yet to publish a summary of representations received to the consultation, or make any formal announcements. This means that ESC C16 remains intact at present.
The ICAEW Tax Faculty responded to the proposed changes; its members are concerned that statutory enactment would have ‘capped’ the amount that could be repaid under the proposed statutory replacement to a mere £4,000.
Amid concerns that HMRC is confusing the tax position with the company law position, it also appears that HMRC's motivation to make changes is primarily driven by the fact that it feels that the concession is being exploited.
In its response the ICAEW says:
"It is of concern that tax legitimately payable may be being evaded using ESC C16. We would welcome further information from HMRC as to exactly how the existing concession is being exploited."
"We believe that HMRC should explore other ways in which the effect of the concession can be retained but with more safeguards to minimise the risk of evasion. This may involve more information being provided at the time the statutory equivalent of the concession is ‘granted’ so that HMRC can trace, if required, that the tax has been paid by the shareholders. There might even be a withholding on account of the potential tax liability to ensure that the eventual liability will be settled."
"At the present time the government is seeking ways to remove burdens on business. We do not think that the current solution put forward in this consultation is an appropriate one in the light of that overall government policy approach."
"However, if the Government is minded to proceed with a monetary ‘cap’, then we suggest that the £4,000 is increased to a more appropriate amount which will allow small companies to be dissolved without the cost of an Insolvency Practitioner."
Editorial comment
One accountant wrote on the ICAEW website: "Surely it will still be possible for "some taxpayers to escape paying any tax at all on the amounts distributed, or less than they should", even after the concession has been scrapped, by way of liquidation anyway. Or is that too simple?" He is quite right; a distribution made during liquidation is treated as capital, and so removing ESC C16 will not cure any of the "tax avoidance" issues that worry HMRC. A better targeted tax clearance process might do a better job.
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