A government announcement1 on the tax treatment of distributions to shareholders when a small company is dissolved still needs to be modified to be good news for owners of and investors in small businesses, says the Chartered Institute of Taxation (CIOT). The CIOT believes the proposal is still too restrictive as currently drafted.
HM Revenue and Customs (HMRC) had originally proposed that legislating the existing Extra-Statutory Concession (ESC) C16 be restricted to total distributions of no more than £4,000. Following representations from the CIOT and others the proposed ceiling has been increased to £25,000, but this is still a low figure, especially where there is more than one shareholder. The concession that this legislation was designed to replace had no limit.
Andrew Gotch, Chairman of the CIOT’s Owner Managed Business Sub-Committee, met with HMRC during consultation on the proposal, to argue for the ceiling to be increased. Commenting on this week’s announcement he said:
“This is slightly better than the original proposals for small company shareholders but there is still plenty of room to improve the legislation further.
“HMRC’s announcement of a higher ceiling is a step in the right direction. £4,000 would have been a ridiculously low level which would have rendered the legislated concession barely worth having. £25,000 is an improvement, but we would have liked to have seen a higher limit calculated per shareholder, or indeed no limit at all. The Government’s argument is that a low limit is needed for anti-avoidance purposes, but we have been offered no evidence that this concession has been abused. I hope the Government will consider a further increase to, or removal of, the ceiling during this proposal’s legislative passage so that the new law genuinely reflects the original concession.”
Andrew Gotch explained why the measure is necessary:
“When a solvent company ceases trading and there are assets to be divided up among shareholders it is right that distributions are treated fairly for tax purposes.
“The formal winding up process, using a liquidator, can be costly and protracted. For a small company with straightforward affairs, the alternative of distributing the company’s remaining assets to shareholders once creditors have been paid and then applying for the company to be struck off the Register of Companies, is attractive, cost effective and efficient. In particular, it is in keeping with the Government’s objective of simplifying the tax system for small businesses and reducing unnecessary burdens.
“HMRC have traditionally recognised this in the past through an ‘extra-statutory concession’ which allowed them to treat the distributions the same provided their position, and that of creditors, is protected. Putting this concession on the statute books is a welcome move, especially given the House of Lords’ challenge a few years ago2 to the extent of HMRC’s discretion in areas like this: but it is important that the spirit of the concession is replicated in the legislation that is designed to replace it”
Notes to Editors
- HMRC announced this week that they are to write into law ESC C16. The original concession to some extent equalises the tax treatment of a distribution made when a company is dissolved without going through a formal winding up (which can be costly and drawn out) with that of a distribution made when a formal winding up does take place. This will normally mean the shareholders pay less tax, as the money received will be treated as a capital payment (liable for capital gains tax and potentially eligible for entrepreneurs’ relief) rather than as a dividend. Shareholders do not have to incur the considerable costs of a formal liquidation; and the terms of the concession ensure that all creditors, including HMRC, are protected.
- The House of Lords' decision in R v HM Commissioners of Inland Revenue ex parte Wilkinson  UKHL 30 challenged the scope of HMRC's administrative discretion to make concessions not set out in statute. Putting ESC C16 into legislation is part of HMRC’s programme intended to give statutory effect to existing ESCs where these may exceed the scope of that discretion.
- HMRC’s announcement (three pages) on ESC C16 can be viewed in full at http://www.hmrc.gov.uk/tiin/tiin-esc-c16.pdf
- The CIOT’s response (five pages) to the consultation on ESC C16 can be viewed in full at http://tinyurl.com/bw5rqbx
9 December 2011