When a limited company is dissolved there are normally assets to be divided up amongst the shareholders. ESC C16 currently allows final distributions on a winding up to be treated as capital rather than income and therefore subject to capital gains tax rather than income tax.
Where shares have been held in the company for more than one complete year then Entrepreneurs relief may also be available thereby reducing the capital gains tax rate to 10%.
ESC C16 is exactly what it says it is – a concession, which is granted by HMRC, upon application and subject to a number of conditions being satisfied. For a small company with straightforward affairs, the concession allows them to avoid having to go down the formal winding up process that requires the use of a liquidator, which can cost, on average, around £7,500.
The concession is now to be put on a legal footing as from 1st March 2012. Chapter 3 of Part 23 of the Corporation Taxes Act 2010 will be amended to cap distributions on an informal winding up at £25,000. If total distributions exceed £25,000 they will be taxed as dividends in the hands of the shareholders. Basic rate taxpayers will pay no tax on dividends but higher and additional rate taxpayers will incur a higher tax liability. This can be avoided, however, if the company is formally wound up.
HMRC justify the imposition of the £25,000 ceiling as a counter tax avoidance measure. It had originally proposed a cap of £4,000 but following concerns and representations made by professional bodies, this was considered too low to be of value to business.
Those contractors currently contemplating closing down their company's may now wish to ensure that this is done before March of next year so as to take advantage of ESC C16 in its more generous form.
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