On 1 March 2012, the tax treatment of distributions made by companies which are about to be struck off the register changed. Companies and their owners may now face the additional cost of a formal winding up to secure the best tax treatment for shareholders.
How to put and end to a company
Where clients want to bring an end to a company and have its surplus assets distributed to shareholders, one possibility is to put the company through a formal winding up. However, this requires the appointment of an insolvency practitioner as liquidator and so is likely to take longer and be more expensive than the alternative of a distribution followed by striking the company off.
The alternative involves simply distributing the company’s assets to the shareholders (subject to addressing the company law rules on distributions) and applying to Companies House for the company to be struck off the register.
From a tax perspective, distributions of assets made to shareholders as part of a winding up are treated as capital receipts. Individual shareholders will therefore potentially realise a capital gain, taxable at 18% or 28% (or at 10% if the conditions for entrepreneurs’ relief are satisfied).
By contrast, distributions made ahead of a striking off are not part of a winding up and so strictly are taxed as income – just like dividends. For a top-rate (50%) income tax payer, this would likely mean an effective 36.11% tax rate on the amount received.
What was the previous tax position?
For many years HM Revenue & Customs operated a concession which applied as long as they were given assurances, including that the company did not intend to carry on business in future and intended to be struck off. If so, HMRC were prepared to regard distributions made as part of a striking off process as having been made under a formal winding up, securing capital treatment for the shareholders.
What has changed?
HMRC have withdrawn the concession in question with effect from 1 March 2012. Formal legislation has taken effect in its place, but with one key difference: a new limit of £25,000 has been introduced. This limit applies per distributing company, not per receiving shareholder, and so where the distributions total more than £25,000, every shareholder will now be taxed on the basis of receiving an income distribution.
For this reason, shareholders wishing to bring an end to their company now have to assess whether this rule change affects them. If so, they must consider their individual tax positions and decide whether any tax saving they may make, if they receive a capital rather than income distribution, makes the extra cost and administration of a formal winding up worthwhile.
The new £25,000 limit may provide a boost to the business of insolvency practitioners, but other business owners are likely to be struck by the thought that this change should have been struck out.