New concession lowers tax burden for closure of small businesses

A new HM Revenue & Customs extra-statutory concession, coming into force on 1st March 2012, will enable solvent companies to distribute capital assets with a considerably smaller tax burden.

For solvent companies that voluntarily cease trading, for example because of retirement or the restructuring of a group of companies, the new ESC, C16 considers a distribution of below £25,000 to shareholders to be a ‘distribution of capital’ rather than a ‘dividend payment’ so that capital gains tax rules can apply instead of the normal rate of income tax.

The ESC recognises that in smaller cases, the cost of liquidating a company could be disproportionately high compared to the value of the assets distributed and so provides that a solvent, smaller company can be struck off as if it had first been through the members voluntary liquidation process (MVL). 

What does this mean for tax practitioners? 

Where their clients wish to dispose of unwanted solvent companies for tax purposes, if the assets are below £25,000 these can be distributed to the shareholders and the usual steps taken for voluntary striking off under the Companies Act 2006.  If the assets are over £25,000, steps should be taken to put such companies into MVL to minimise the tax burden to their clients.

Alan Price commented on the new legislation:
“At Marshman Price, we often work with tax practitioners in group reconstructions and simple MVLs as part of efficient tax-planning for their clients.  Previously there had been an informal limit of £4,000, although it was never quite clear where this figure came from, but the new extra-statutory concession provides very clear clarification and allows us to maximise tax efficiencies for many business owners and shareholders.”

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