The draft SI is due to ‘have effect in relation to distributions made on or after the date on which the Order comes into force’, which is due to be 1 March. Where the process starts before 1 March and distributions straddle 1 March, HMRC have indicated to the ICAEW Tax Faculty, who have kindly shared this with us, that they consider that pre – 1 March distributions are ‘counted’ to determine whether the post – 29 February £25,000 cap has been breached.
If this is correct, even where an ESC C16 application has been accepted by HMRC in respect of distributions made before 1 March, and a distribution of £25,000 or less is made on or after 1 March, it will not be eligible for CGT treatment if the accumulated distributions made in anticipation of the striking off exceed £25,000. Companies in this position may wish to consider the timing of distributions to minimise those distributed after 1 March.
We are urgently pursuing this issue with HMRC.
It should also be noted that in future years, where distributions straddle 6 April, the tax treatment of the distributions before 6 April cannot be determined until it is known whether the quantum of the total distribution(s) exceeds £25,000.
The informal exchange with HMRC states:
Suppose there was a distribution of £10,000 before and £20,000 after 1 March. You think the £20,000 will be treated as part of distributions in excess of £25,000 and so subject to income tax. But doesn’t the SI say that it only applies to distributions made after 1 March? So shouldn’t you exclude the £10,000 in determining the quantum of the distributions under the new law.
- If a company makes distributions before 1 March and distributions after that date, which in total come to more than £25,000, then all the distributions made on or after 1 March will be liable to income tax as dividends. However, distributions made before 1 March remain eligible for treatment as capital receipts under the terms of ESC C16. That is not affected by the proposed legislation.
- Article 18 refers back to the treatment of distributions in section 1030A (3). Section 1030A(5)(b) is simply a description of a distribution falling within section 1030A(3) – it is not limited in the way you suggest. So in the example you give the £10,000 is not excluded from the quantum of the total distribution(s).
- If HMRC had agreed to apply C16 but some of the distributions had been delayed until after 1 March, the terms of the new legislation would apply to those distributions. As can be seen from the draft legislation, which has recently been published, the date of a distribution will govern its tax treatment for these purposes.
- A taxpayer can have no legitimate expectation that the law will not be enforced against him. I am aware that some agents have been trying to rush through applications for ESC C16 treatment en bloc, but this is a mistaken approach… even if the application has been made quite properly, and all the assurances given, if the distribution is made on or after 1 March the ESC cannot apply but the terms of the new distribution will.
27 January 2012