News : The end of ESC C16 as we know it?
What is ESC C16?
An Extra Statutory Concession (ESC) is a relaxation to a particular law which gives taxpayers a reduction in a tax liability to which they would not be entitled under the strict letter of the law. The taxpayer can apply to HMRC for the ESC to be applied to a specific situation.
Concession 16 specifically relates to the closing down of a Limited Company and, in particular, the treatment of the final distribution.
Under the strict letter of the law the final distribution would be treated as an income distribution and taxed accordingly, however, if ESC C16 is applied for and granted the final distribution can be treated as a capital distribution as would be the case under a formal winding up. This generally brings tax advantages as the capital gains tax rates are normally lower than income tax rates and there are additional reliefs available (CGT allowances and entrepreneurs relief).
What will change?
There is currently a consultation process taking place that involves making a number of ESCs statute i.e. they are automatic and don’t need to be applied for.
One of these is ESC C16 and if this becomes statue there will be a limit to which the concession will apply. This is currently planned to be up to £4,000 of share capital and up to £4,000 of cash/assets where as currently there is no upper limit to the ESC C16.
Obviously this will affect a number of clients upon closing their business if the proposed changes take place so what can you do to plan around this? Options include:
· Close your business now – This would be an option if you are currently contemplating company closure because you are not trading, get the closure in now and you should still be able to utilise ESC C16;
· Voluntary Liquidation – If closing a company you can use a formal liquidation, this should ensure that the distribution is treated as capital but it is quite costly (generally between £3,000-£5,000) so might not be worth it in all cases;
· Take the closing funds as a dividend – this might not be as tax efficient as capital but it would be almost instantaneous in terms of having being able to distribute the funds.
If you are planning on closing your company in the near future you should consider the above carefully and contact your account controller for full details if you need any further information.
You can read our Factsheet on closing a company here.