When a company is put into receivership by a liquidator and is dissolved, all the remaining assets are distributed as a capital payment to the shareholders.
A liquidator could cost a company around £4000 in fees to liquidate the company.
For this reason, many companies decide to close their company down by way of S652 or 652A of the Companies Act 1985.
If a company is voluntary applying to be struck off the register, its officers may apply to HMRC for an application under Extra Statutory Concession C16 (ESC C16) to distribute company assets as a capital distribution not dividend income, thus potentially saving personal tax for shareholders.
Cash from a trading limited company is usually distributed to share holders as dividends.
This is classed as income and the recipient will be liable for personal tax on that amount; less personal allowances and the company tax credit already paid.
If an ESC16 is granted by HMRC then all assets of the company must be distributed before the company is dissolved under Section 652 or 652A of the Companies Act 1985.
Where ESC C16 is granted, all cash received by the shareholder will be subject to capital gains tax (CTG) and not treated as income (or taxed as income).
This can be a useful strategy if you have already used all your Personal Allowances and the 20% Tax Bracket from dividend income and salaries in a tax year.
The current annual exempt amounts for individuals and trustees of capital gains tax relief for 2009-10 are:
|
Annual Exempt Amount
|
2009-10
|
|
Individuals, personal representatives and trustees for vulnerable persons
|
£10,100
|
|
Other trustees
|
£5,050
|
All gains made over the Annual Exempt Amount are subject to 18% CGT (2009/10). Capital gains are reported on the supplementary pages of the annual self-assessment tax return. The CTG is due for payment by 31st January following the tax year in which the gain was made.
Qualifying for ESCC16
A company wishing to make an application for ESC C16 has to satisfy certain conditions:
· The company must is not subject to an investigation either by an individual or a corporation
· The company must not intend to trade in the future
· All creditors and debtors must be paid
· Will distribute all of its assets to its shareholders
· Must intend to seek or accept a striking off order and dissolution
· The company must pay all of its corporation tax due
· The officers and shareholders of the company must pay all CGT due
To make an application you or your accountant will need to write to HMRC detailing the above points. All the officers of the company are required to sign the application letter.
When an application is made, HMRC will treat the company as formally winding up on the date the company has declared its intentions to seek a striking off order; or at an earlier date if the company had ceased trading and started distributing its assets.
If a company has made a claim under ESC C16 and distributed the assets as a capital distribution and fails to have the company struck off the register; HMRC have the right to cancel the order and reclaim the full tax on the assets.
Capital versus Income – The Financial Impact
Example
ABC Ltd have ceased trading and the Director wishes to close the company altogether. The only shareholder is the Director. All debtors and creditors are up to date. The company has £20,000 worth of assets to distribute before it is struck off.
The Director’s total income for the tax year is £42,700 made up of £5,700 salary and £37,000 gross dividends. Tax rates and allowances for 2009/2010 have been used, and there are no other personal capital gains.
Distribution made by dividend income
|
Description
|
Amount £
|
|
Salary
|
5,700
|
|
Dividends 20,000 + 37,000
|
57,000
|
|
Total income
|
62,700
|
|
Personal allowance
|
(6,475)
|
|
Total Taxable Income
|
56,225
|
|
Tax on 37,400 @ 20%
|
7,480
|
|
Tax on 18825 @ 32.5% higher dividend rate (56225-37400=18825)
|
6,118
|
|
Total Tax Due (of which 5,182 tax credit has already been paid)
|
13,598
|
Distribution made by capital income
|
Description
|
Amount £
|
|
Salary
|
5,700
|
|
Dividends
|
37,000
|
|
Total Income
|
42,700
|
|
Personal Allowance
|
(6,475)
|
|
Total Taxable Income
|
36225
|
|
Tax on 36225 @ 20%
|
7245
|
|
Capital gain 20,000 less 10,100 allowance times 18% CGT due
|
1782
|
|
Total Tax Due (of which 3,363 tax credit has already been paid)
|
9027
|
The total personal tax savings made are £4571 by making a capital distribution using the ESC16 route for closing a company.
In some circumstances, where ESC C16 has been applied and a capital distribution made;Entrepreneur's Relief may be applicable making the capital gains tax a 10% effective rate.
In Conclusion
There are tax advantages to be made when closing a company using the ESC C16 route. However, if you later change your mind and leave the company dormant, HMRC are within their rights to reclaim underpaid tax accordingly. Interest and penalties may also apply.
Taking dividends at the year end when trading up to the 20% bracket could save you tax in later years if you decide to wind up the company and have accumulated large reserves.
It is advisable to seek professional advice before making such an application under ESC C16.