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On 13 December 2010 HMRC published a consultation regarding the statutory enactment of Extra Statutory Concession C16.

The consultation is at:

The consultation runs to 7 March 2011.

The consultation includes draft clauses, presumably for the 2011 Finance Act, that would become tax legislation for 2011/12 onwards.

The problem is the draft clauses significantly curtail the existing concession by introducing a cap of £4,000.

What is ESC C16?

ESC C16 is a tax relief for shareholders that applies on the closure of a limited company.

Broadly, under tax law, any distribution from a company to its shareholders is treated as income (for practical purposes dividend) and taxed as such, i.e. charged to Income Tax with a credit for Corporation Tax paid.

There are some exceptions to this, notably (i) purchase of own shares (which is a notoriously complex and narrow relief) and (ii) on the liquidation of a company. In these circumstances the transfer to the shareholders is charged to Capital Gains Tax, which is normally less than Income Tax.

Subject to some conditions, broadly around the closure of the company being permanent and not part of a phoenixing scheme or similar, ESC C16 extends the CGT treatment available on liquidation of a company to informal strike offs using the Companies House dissolution / strike off procedures under the Companies Act.

The importance of this concession is that a formal liquidation is quite expensive, probably around £4,000 as a minimum, and needs to be undertaken by a qualified Insolvency Practitioner. By contrast a informal strike off costs £10!

Put simply in future, if the reserves in the company exceed £4,000, to get CGT treatment it will be necessary to pay for a formal liquidation, whereas at present there is not normally a need to pay for a formal liquidation unless the company is insolvent or it is a complex case.

This will impose unnecessary costs on small businesses.

Why is the ESC being changed?

HMRC has a ongoing process of reviewing and legislating ESCs as its come to light that legally they may be outside HMRCs powers.

However that does not explain why the £4,000 cap is being introduced.

It certainly does not raise, in theory, anything extra for the Government, as shareholders can achieve the same tax treatment if the company is liquidated.

In reality the Government would gain as some small companies would decide a liquidation is not worthwhile even though reserves are over £4,000, and, of course, there would be tax and VAT on the Insolvency Practitioners fees!

Really the only people to gain from this are Insolvency Practitioners. The gain to the public purse would be minimal, but entrepreneurial small businesses penalised.

It is a rather strange regulatory roll back. When most of the talk these days is about “deregulation” or “light touch”, here extra regulation and bureaucracy is being introduced.

HMRC may counter the cap is to avoid misuse of the concession, but that is disingenuous. First, as the same reliefs, without restriction, can be obtained by a formal liquidation, and secondly as the existing concession can only be accessed if the company warrant there is no misuse, a position that could easily be legislated.

It sees, quite simply, bad government.

How much Tax is saved under the Concession?

It depends on circumstances. If the distribution falls inside the shareholders Basic Rate Tax band, then no saving at all as there would be no Income Tax.

For 40% or 50% tax payers it depends on personal circumstances, other income and gains, availability of Entrepreneurs Relief, availability of CGT annual exemption.

We’ve prepared a briefing with a illustrative table, for a scenario of:

~ £100,000 of assets after Corporation Tax and all other taxes / debts paid

~ shareholders are 40% taxpayers

This shows:

~ Tax due if charged to Income Tax £25,000

~ Tax due if charged to Captial Gains Tax and Entrepreneurs Relief is not available £25,172

~ Tax due if charged to Captial Gains Tax and Entrepreneurs Relief is available £8,990.

What can people do?

From a planning perspective, probably not a lot. If there is a plan to close a company down and its assets will exceed £4,000 then this could be accelerated, but at the risk of the tax tail wagging the commercial dog.

We do recommend that all our corporate clients:

~ respond to the consultation; and

~ write to their MPs