The 1 March deadline approaches – what to do?
As we noted in our earlier briefing note the First Delegated Legislation Committee approved the Statutory Instrument The Enactment of Extra Statutory Concessions Order 2012 on Monday 30 January which means that distributions which are made on or after 1 March 2012 in anticipation of a dissolution and which exceed £25,000 will be subject to income tax and not capital gains tax.
The way to preserve capital gains tax treatment will then be to enter a formal liquidation but that may be a rather expensive exercise.
From what our members have been telling us, which is confirmed by HMRC, it is clear that there are a lot of people trying to beat the 1 March deadline and dissolve companies under the ESC C16 rules.
There is no limit, or cap, on the amount of the distribution that can be made under ESC C16 and be subject to CGT.
Making the distribution before 1 March
HMRC has confirmed to us that as long as you have written to HMRC and provided the required assurances and you make the distribution in February then the fact that you have not heard back from HMRC before doing so does not matter. You still come under ESC C16 and pay CGT.
‘[In relation to] applications made but not finalised before 1 March, [HMRC] can confirm that it would not take a point on the absence of a response by HMRC provided that all the conditions attaching to the current ESC are met. If the distribution is made in February, the distribution can be treated as capital receipts in the hands of the shareholders and the £25,000 ceiling does not apply.’
If all the company assets are not yet in cash then it should be possible to make a distribution in specie and come within ESC C16. If the affairs of the company are complicated then you may need to take appropriate legal advice to make sure that what you are proposing to do would be treated as a distribution, if challenged, and that you will have complied with all the assurances you need to give under ESC C16.
If you cannot make the full distribution before 1 March but need to make one distribution before that date and distribute the rest of the company assets afterwards then beware. The current view of HMRC is that for the purpose of determining whether the post 1 March distributions exceed the £25,000 limit, and are liable to income tax, you have to take into account any interim distributions made before that date.
We do not believe that the HMRC analysis is correct. Article 18 of the Statutory Instrument (SI) states the new rules will only have effect in relation to distributions made on or after 1 March. So it is not clear to us how you can take pre March distributions into account when determining whether you have breached the £25,000 cap on March and subsequent distributions. We are in discussion with HMRC on this point and if there is any change in HMRC’s view we will notify everyone via the website.
Note: since first posting this news item we have had further email correspondence with the HMRC policy person and they continue to argue that their analysis of the legislation is correct. We have taken informal advice from a barristers' chambers and they support our interpretation. If you make a distribution under the new regime which of itself is less than £25,000 but which, together with earlier relevant distributions, exceeds £25,000 you will have to make up your mind as to whether to return that subsequent distributions as liable to capital gains or income tax.
A future tax return filing problem
The general aggregation principle could also present a bit of a problem when you are filing tax returns under the new regime. Suppose you make a distribution in March 2013 of less than £25,000 but the distribution together with a subsequent final distribution come in total to more than £25,000. This means that all the distributions are liable to income tax. If the second distribution is not made until after the tax return covering the first distribution is filed you will have filed on the basis that that first distribution was liable to CGT but it will subsequently become liable to income tax because of the second distribution.
The new regime
The relevant statutory provisions governing the new regime which appear in the SI insert two new sections, 1030A and 1030B, into Corporation Tax Act 2010. One obvious danger in the new regime is that if the dissolution is delayed more than two years after the distribution or there is a similar delay in settling all the debts and liabilities then income tax will be applied to the distribution even though it was for an amount less than £25,000. Again you are going to have tax return filing problems.
What has been going on behind the scenes
We responded to the original consultation and suggested that HMRC should explore other ways in which the effect of the concession could be retained but with appropriate safeguards to minimise the risk of avoidance/evasion if that was a real problem as we were told by HMRC it was. At a time when the government is trying to reduce the burdens on business we said that if a proposed cap had to be introduced then £4,000, the proposed cap at the time of the consultation, was far too low.
We asked for evidence of the avoidance/evasion that HMRC suggested was prevalent in conjunction with ESC C16 but we have not had any information on this.
We and CIOT wrote jointly on 23 January 2012 to the Exchequer Secretary, David Gauke, who sat on the Delegated Legislation Committee suggesting that the SI ought to be withdrawn and that a new SI ought to be presented to Parliament with no limit to the amount that can be paid out prior to a dissolution and be subject only to capital gains tax. We also wrote in similar terms to all the members of the Committee. As noted above our advice has not been followed.
We have tried to keep readers up to date via the website as things have developed and in particular provide practical advice as to what they ought to be thinking about doing. What to do now is a real concern with 29 February less than four weeks away at the time of writing.
If you have any comments or any queries don’t hesitate to contact Ian Young email@example.com