For a Chancellor committed to the abolition of red tape, one of the subtle changes George Osborne introduced this year is likely to tie some SME owners up in the stuff. For those who may be seeking to wind up a solvent business, the new measures have the potential to heap time, costs and complexity into the process.
Winding Up A Solvent Company
Legally, the default position for winding up a solvent company was, and still is:-
1. Wind up informally via a strike off
2. Liquidate through a members’ voluntary liquidation
Tax - the tax treatment for the final distributions made to the shareholder(s) under both of the above options is:-
1. strike off - distributions are taxed as dividends
2. members’ voluntary liquidation -distributions are taxed as capital gains
Whilst everyone’s tax position is different, for higher rate and top rate taxpayers capital gains tax treatment will generally afford a much better outcome than dividend treatment; even more so if entrepreneur’s relief is available.
Generally therefore the preference would be to seek capital gains treatment.
Pre 1 March 2012
As liquidations are generally much more costly than the £10 fee payable to Companies House for a strike off, prior to March 2012 HMRC used to allow - via Extra Statutory Concession C16 – that, providing certain criteria were met and undertakings given, a solvent company could be struck off without the need for a liquidator to be appointed, and any distributions treated as a capital gain.
That concession therefore allowed the best of both worlds – the cheaper option for winding the company up and the more efficient tax treatment on the distribution.
1 March 2012
From the above date, however, Concession ESC C16 no longer exists but is now enshrined in legislation – with a nasty twist.
Under the new legislation for company strike offs,
· If the assets to be distributed are less than £25,000, then the shareholder automatically gets capital gains tax treatment (and an application to HMRC is no longer required), but
· If the assets are above £25,000, any distribution will be treated as a dividend.
So for companies where the assets are above £25,000, the better option is likely to be winding the company up formally via a members’ voluntary liquidation. The subsequent distribution of assets will be taxed on the shareholder(s) as a capital gain.
However, winding up need not be an expensive service. As Maureen Leslie, MLM Director of Corporate Solutions explains:
“MLM has a risk based approach to members’ voluntary liquidations.
Working alongside the Company’s tax adviser, we can provide a cost
effective solution to the difficulties Aiden has highlighted, which
removes any risk to the business owner.”
The message is clear – anyone intending to get rid of a solvent company should always obtain good advice, ideally from a chartered tax adviser. As tax on the transaction can range from 10% to over 40%, some time and money invested up front could provide significant savings later.
A note about the Guest Blogger
Aidan McLaughlin is a partner at McLaughlin Crolla LLP. He has more than 25 years experience in tax, advising sole practitioners and large corporations alike.
Aidan specialises in reconstructions, acquisitions, mergers and corporate finance.For more information, please see www.mclaughlincrolla.com