Enactment of Extra-Statutory Concession C16 (ESC C16)
Written by Sally Fletcher for plan.it, December 14th 2011
When a business is dissolved, current legislation enables shareholders to withdraw the retained profit in a tax-efficient way, without the need for formal liquidation. For anti-avoidance measures, HMRC are changing the rules by imposing a £25,000 limit on the concession that is likely to have a negative financial impact on those shareholders with capital gains above the proposed amount. The alternative route of engaging a liquidator could prove relatively costly for a small business.
The current ESC C16 permits a business that is winding up to distribute the assets as capital rather than dividend income.
Entrepreneur's Relief can be applied to qualifying capital gains where a 10% net effective tax rate is achieved.
The legislation has been subject to consultation, and in December 2010 the fourth amendment was published with a proposed distribution ceiling of £4,000. Currently there is none.
Following compelling feedback, and in advance of the consultation deadline set for 7th March 2012, HM Revenue and Customs published Enactment of Extra-Statutory Concession C16 on 6th December 2011, increasing the ceiling to £25,000.
Subject to parliamentary approval, the legislation will affect distributions made on or after 1st March 2012.
Many commentators still feel the limit is unnecessarily low and there is an active petition to lobby Parliament against the enactment. You may sign this petition online and then a confirmation email will be sent which requires authenticating.
Effects of the Enactment on company
closure
Businesses qualifying for the current ESC C16 with assets above £25,000 should seek professional advice from plan.it Services before the legislation comes into effect.
On or after 1st March 2012, assets of up to £25,000 distributed using Enactment ESC C16 will remain unchanged.
Where the distributable assets will not put the shareholder's gross annual income above £42,475 (2011/12), a dividend distribution will not incur additional personal tax.
Where the distributable assets will put the shareholder's gross annual income above that amount, the first £25,000 qualifies as a capital distribution (and potentially for Entrepreneur's Relief) leaving any remainder as a dividend distribution subject to personal tax for higher rate payers.
Formal voluntary liquidation is an alternative route for capital distributions with an uncapped amount that Entrepreneur's Relief may then be applied to. However, HMRC estimate the cost of liquidation at £7,500 for a small business with uncomplicated affairs (plan.it would expect the cost of liquidation to be considerably lower for a Personal Service Company).
Tax Rates (2011/12)
Capital gains
|
Annual exempt allowance (AEA) |
£10,600 |
|
£0 - £35,000 |
18% |
|
£35,001 and above |
28% |
There is no upper rate
|
Dividend income |
|
Additional liability |
|
0 - £35,000 |
10% |
0% |
|
£35,001 - £150,000 |
32.5% |
25% of net dividend |
|
£150,000 and above |
42.5% |
35% of net dividend |
Example under the proposed changes
Capital distribution versus dividend distribution
Jeremy has a 100% shareholding in his personal company which has traded for 8 years. He decides to retire and closes his company which has £72,000 of retained profit. Assuming that the AEA and basic tax band have been used, the effective tax charge is as follows:
Dividend cash distribution
£72,000 x 25% equivalent net rate (22.5% x10/9) = £18,000
Capital distribution with Enactment ESC C16 and Entrepreneur's Relief
£25,000 less annual exempt amount of £10,600 x 10% = £1,440
£47,000 x 25% equivalent net rate (22.5 x 10/9) = £11,750
Total tax = £13,190
Formal voluntary liquidation and Entrepreneur's Relief
£72,000 less capital gains allowance of £10,600 x 10% = £6,140
With an additional cost of up to £7,500 for liquidation
This brief is for guidance purposes only. In all cases we would recommend that you discuss any queries with professional advisers. plan.it Services is a firm of Chartered Accountants regulated by the Institute of Chartered Accountants in England and Wales. Please feel free to contact us if you have any questions relating to this article or other accounting issues affecting contractors.
