The Institute of Chartered Accountants in England and Wales (ICAEW) do not agree with HMRC in its analysis as to how the new proposals for legislating ESC C16 on 1 March 2012 will work.

A draft Statutory Instrument was published on 23 January: ESC C16 will be enacted on 1 March 2012. It means that when a company is struck off after 1 March 2012, any distributions made in excess of £25,000 will be subject to income tax, see ESC C16: tax & striking off a company

A problem arises in the technical analysis where a strike off under ESC C16 was agreed with HMRC before March 2012, and distributions are made both before and after 1 March 2012 and combined they exceed £25,000. 

HMRC interprets the proposed rules as saying in that case all the distributions after 1 March 2012 are subject to income tax treatment. 

The ICAEW says, “So for instance if you pay out £10,000 in mid February having got the agreement of HMRC that ESC C16 will apply but pay out a second and final distribution of £20,000 after 1 March 2012 then the £20,000 will be subject to income tax. This is the technical analysis of HMRC. We have suggested to HMRC that it is not correct to aggregate the pre 1 March distribution in these circumstances as the SI specifically states that it only applies to post 1 March distributions. HMRC do not agree with our analysis. “ 

The ICAEW warns that if an ESC C16 agreeement is in place prior to 1 March 2012 it is recommended to make a distribution in specie before that date to secure capital treatment.

The proposed rules

The draft Statutory Instrument which it is intended will enact ESC C16 on 1 March 2012 currently says (with our explanations added to assist you in italics)

Draft Statutory Instrument - issued 23 January 2012

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(2) (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 (made during the course of striking off) is not a distribution of a company for the purposes of the Corporation Tax Acts (so it is treated as a return of capital and subject to CGT) 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) (made within the Companies Act striking off process), the total amount of the distributions, does not exceed £25,000.