HM Revenue & Customs (HMRC) has limited discretion to make concessions in relation to statutory tax provisions. Following a recent judicial decision suggesting that this discretion was more limited than had been assumed previously, it has embarked on a programme of enacting many of these concessions. One such is a concession benefiting shareholders of dissolved small solvent companies, which has recently been enacted in modified form and will come into effect on 1 March 2012.
ESC C16 was enacted on 31 January 2012 when The Enactment of Extra-Statutory Concessions Order 2012 received Parliamentary approval. Until now, ESC C16 has allowed shareholders of those companies dissolved without having had a liquidator appointed to treat any distribution of surplus assets as capital payments rather than income. The new statutory provisions will now require such distributions that exceed £25,000 to be taxed as dividends.
In a formal winding up, distributions to shareholders are treated as capital payments rather than income, which is otherwise the norm. ESC C16 equalised the tax treatment of a distribution made outside the winding up process by a small company facing disproportionate winding up costs. Small companies with surplus assets may be dissolved for a number of reasons. From a tax perspective, however, the goal of shareholders is always going to be the same, irrespective of the circumstances behind a company’s dissolution: they will be looking for a tax efficient way to end their investment in the company.
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