Opportunity to dissolve unwanted companies

When dissolving an unwanted company there are two main options: a formal liquidation via an Insolvency Practitioner; or an informal striking off of a company directly with Companies House. The tax treatment of the informal winding up has long been governed by a Revenue concession referred to as ESC C16. The effect of this has been that a distribution to shareholders in an informal winding up can be treated as capital and potentially subject to 10% capital gains tax.

In practice this was fine unless the share capital of the company being wound up was £4,000 or more in which case the Treasury’s Solicitors’ Department of the Government could claim ‘Bona Vacantia’ and take possession of assets of behalf of the Crown.

This has changed recently following changes to the Companies Act and has led the Treasury Solicitors office to remove their £4000 limitation entirely. This now means that a private company with any level of share capital can potentially use the informal winding up route and secure capital gains tax treatment for distributions to shareholders. This could have implications where asset value has been accumulated in a company that could benefit from the beneficial tax rates available to capital gains versus higher levels of income tax.

This offer is only available for a limited time!

HMRC are withdrawing their concession with effect from 1st March 2012, and replacing it with new legislation. This new legislation has now been published and has set a limit of £25,000. This new limit does not refer to the share capital; but to the total funds distributed. As such it is likely that this change will affect many businesses who would previously have been able to dissolve unwanted companies informally.

In this interim period before the new legislation is active there is surprisingly no upper limit at all, so companies of any size can choose the informal winding up route. Therefore, between now and 29 February 2012 a company being dissolved informally can distribute funds of any size to a shareholder and, if HMRC agree that the concession applies, the shareholders can be taxed on this as a capital gain rather than income.

Whilst these changes will help some companies avoid the cost of a formal winding up, it should also be remembered that this informal approach can leave the door open to future claims against the company, its directors or shareholders and is only possible if there is no objection to the dissolution from an interested party. The usual dangers of dissolutions outside the protection of a formal liquidation still apply.

Fiander Tovell recommend you take professional advice before embarking on any form of winding up. There will be many circumstances when using an Insolvency Practitioner for a formal winding up process will be the recommended course of action.  If you wish to discuss this issue further please contact our office.