Change to ESC C16 announced

In December 2011, the HMRC announced their intention to formally codify ESC C16 into the tax legislation. This will be effective from 1 March 2012, and the treatment will no longer be ‘extra statutory’. This  will affect clients who have more than £25,000 in surplus funds within the company, and decide to close the business.

The personal tax position upon cessation will be affected by this.

 

When you close down your company, any final dividend payments you make to yourself get taxed as dividend income in the normal way within your personal tax return. You can however apply to have these dividend payments taxed as a capital gain, by applying for the concession ESC C16 with the HMRC. This carries significant tax advantages if you are a higher rate taxpayer (earn over £42,475 in this current tax year), AND have traded through the company for more than one year.

 

ESC C16

Once you have ceased trading, ESC C16 allows for any final dividend payments you make to yourself to be taxed personally on you as a capital gain, rather than as normal dividend income. This is useful if you have a substantial amount of retained earnings, and want to extract it in the most tax efficient means.

Under the current rules, there is no limit to the size of the final dividend payments you can make that get treated in this way, and so long as your company has traded for more than one year, you will pay a maximum of 10% tax on the final dividend payments (taxed as a capital gain and using Entrepreneurs Relief). Without this concession, and if you are a higher rate tax payer, any final dividend payments would get taxed at 25% – so it’s a worthwhile concession for our clients who have a significant amount of retained earnings in their company.

 

The New Rules

 

With effect from 01 March 2012, ESC C16 will disappear, and it will be replaced with legislation that will treat the first £25,000 of all final dividends payments made once striking off action has commenced, to be taxed as a capital gain. Any distributions made in excess of this threshold, will be taxed as normal dividend income.

As an approximate guide, clients who anticipate having up to £50,000 in surplus funds when they close down, take this route.

The alternative is to engage the services of a Licensed Insolvency Practitioner, and take your company through a Members Voluntary Liquidation. When closing down via a liquidation, ALL final distributions are treated as a capital gain for personal tax purposes, and there is no upper limit. In terms of tax, this solution is on par with the current ESC  C16 regime. The only differences being a Members Voluntary Liquidation is a different process, and engaging a Licensed Insolvency Practitioner will cost in the region of £3,500 + VAT.

We suggest any clients who anticipate having over £50,000 in surplus funds when they close down take the formal liquidation route.

 

What can be done?

 

Very little. This tax change will be implemented on 01 March 2012. If you have ceased trading AND are currently closing down your company AND have more than £25,000 that you intend to extract as a capital gain using ESC C16, we will do our best to ensure the concession is approved before 01 March 2012. Remember however, that it’s a CONCESSION – the HMRC do not have to agree to it, and notification of agreement from the HMRC usually takes between 4 to 12 weeks, so for most clients it is too late to commence ESC C16 proceedings. Keep in mind the HMRC will be aware of these things – the timing of their announcement is no coincidence.

If you want to close down your company right away to take advantage of ESC C16, AND resume trading through a new company, then unless you have a good commercial reason for changing the company, you will be caught by the new Transactions in Securities rules. Ignoring these rules amounts to tax evasion.

However, even with this change, working through your own limited company is still by far the most beneficial form of working in the UK for many individuals running their own businesses. And for those clients fortunate enough to have over £50,000 in surplus company funds, any additional liquidation fees paid are still minor in relation to the significant capital gains tax benefits when winding up your company