Companies cease trading for a variety of reasons; it may be uneconomic to carry on trading, maybe the owner has decided on a change of career or, for some contractors working through their own limited company, they opt for a period of world travel. In any case, once it has been decided to close the company the winding up process is necessary to ensure that the company assets are divided up amongst the shareholders.
Many larger companies appoint a liquidator to handle the winding up process and if this is the case then all distributions of company assets are treated as a repayment of share capital and capital. Liquidators can be a costly expense, on average their fees would be £7,500. If a liquidator is not appointed then S 209 ICTA 1988 treats all distributions as income. HOWEVER it has been possible for companies to use the 'Extra Statutory Concession C16, issued by HMRC which basically means that even if you are a smaller company going through an informal winding up process any distributions CAN be treated as capital and not income.
So why does it matter? The benefit of receiving distributions as capital is that such capital treatment may well produce a lower tax charge on the capital distribution than income treatment as a dividend. It may be possible to enjoy 'Entrepreneurs Relief which in simple terms reduces the tax rate to 10%.
An application must be made to HMRC for the use of ESC C16. Certain criteria must be met in order for HMRC to agree to the concession. Part of Carrington's service for companies going down a closure process is to assist with this application and ensure that the company owner extracts assets and funds in the most tax efficient way.
From March 1st 2012 ESC C16 will be put on a legal footing. Chapter 3 of Part 23 of the Corporation Taxes Act 2010 will be amended with a cap of £25,000 on distributions from an informal winding up basis. If the amount being distributed exceeds £25,000 then dividends will need to be taken to reduce the value to below £25,000.
After the legislation comes into effect on March 1st it will be even more important to evaluate the best process of closing down a company. It may be a case of increasing dividend payments prior to closing so that the £25k limit on capital distributions is not breached, or looking at other tax efficient options. It will also be necessary to weigh up the cost of using an Insolvency Practitioner against the benefit of them being able to distribute everything as capital. Carrington will be able to assist in this evaluation process.
