Prior to 1 March 2012, if you wanted to close your company tax efficiently, you or your accountant would write to HMRC asking them nicely if they’d let you benefit from Extra Statutory Concession C16 (ESC C16).
HMRC were kind and generally said yes. What this meant was you could close down the company using the cheap striking off method (£10 cheque to Companies House) and still benefit from capital gains tax treatment on any final distribution of funds from the company. Without ESC C16 any final distribution would be taxed on the shareholders as dividends, just like previous distributions during normal trading conditions.
Capital gains treatment normally leads to lower personal tax bills than additional dividends, due to the annual exemption of ~£10k plus often entrepreneurs’ relief meant the remaining balance was often taxed at just 10%. Way lower than the typical 25% effective tax rate on dividends (based on you having already used your basic rate tax band).
Since 1 March 2012, ESC C16 has been killed off. Instead of the application process, you are automatically entitled to capital gains treatment upon a striking off if the funds in the company are below £25k. If the company has more than that, the shareholders will be taxed on the whole amount as dividends (bad news for most tax payers).
However, if you put your company through a formal liquidation process rather than get it struck off, you can still obtain capital gains tax treatment regardless of how much is in the company.
Even simple liquidations normally cost at least £3k+VAT, plus around £500 disbursements. It’s therefore worth weighing up the cost of a formal liquidation against the possible tax savings.
Due to a streamlined process and this growing new market for simple liquidations, MVL Online is able to offer formal liquidations for just £995+VAT+disbursements (typically around£500 still, unfortunately little can be done about these).
Our main criteria are that you/your accountant simplify the balance sheet right down to no liabilities, and the only asset being cash in the bank. For the typical contractor this just involves settling any corporation tax/VAT liabilities after you’ve ceased to trade, and potentially selling off any computer equipment the company may own (possibly to the director).
If your company has £50k cash in the bank, the typical overall saving is almost £7k, even after our fees are accounted for. See our tax benefits here for a more full explanation and the workings.
NB we strongly recommend you discuss these options with your accountant before proceeding, predominantly as everyone’s circumstances are different.