Posted by Tax Innovations on 06 Feb 2012

ESC C16: Voluntary Liquidation

When a company goes into voluntary liquidation HM Revenue and Customs (HMRC) allows shareholders to receive the surplus assets of the company as a capital distribution instead of as a dividend. The advantage to receiving these often substantial sums as a capital distribution is that they are eligible for tax at lower rates.

If entrepreneur’s relief is available, a capital distribution could be taxed at an effective rate of as low as 10% instead of being taxed as a dividend receipt at an effective rate of up to 42.5%. However, the significant liquidator’s fees can often outweigh this advantage for small and medium-sized companies.

HMRC Resolved Problem

HMRC resolved this problem by introducing a concession (ESC C16) that allows a company to be wound up with HMRC’s approval and receive any distribution as a capital gain without having to appoint a liquidator. By simply asking HMRC for approval you can wind up your company and preserve the tax benefits without the significant costs of liquidation. However, this advantageous tool has been given a finite lifespan.

As of 1st March 2012, if a company undergoes an informal winding up HMRC will only allow distributions up to a maximum of £25,000 to be treated as capital. If the distribution is over £25,000 the entirety of it will be taxed as a dividend.

It will still be possible to formally liquidate the company to avoid this £25,000 cap but this will mean incurring the expense of appointing a liquidator.