Tax on striking off a company
There are two normal ways to extract funds from a company – dividends, payable from profits, and salary, paid through a PAYE scheme.
However, for limited companies with significant cash balances available, there is another tax-efficient option, allowing the shareholders to have funds returned to them potentially tax-free. The catch? It’s only available on the striking-off of the company.
Extra-Statutory Concession C16, introduced in 1985, enables shareholders to receive a capital gains tax treatment (as opposed to income tax) on the funds received on striking off. This is generally more favourable, and may allow them to access entrepreneur’s relief (with a tax rate of 10%).
On 1 March 2012, ESC C16 was replaced by legislation to formalise the rule, as well as enacting further restrictions – a comparison of the changes are shown below.
– A cap of £25,000 distributable reserves (not including share capital). Prior to this, there was an unlimited cap. If the total exceeds this amount, then the full amount is liable to the income tax treatment
– Automatically approved. Under ESC C16, you had to write to HMRC prior to the strike-off application being approved for them to allow you the concession.
One extra point to mention is that HMRC have stated they will review all dividend payments in the last year of operation, and if it was seen to be aimed at reducing the reserves below the £25,000 limit, the balance may not qualify for capital distribution.
If the reserves exceed the £25,000 cap, then shareholders may consider a solvent Member’s Voluntary Liquidation (MVL). The process is longer and more formalised, but will guarantee the capital treatment of the assets. There may be tax savings, after factoring in the cost of the process, especially where there are significant reserves.
If you are considering either of the above processes, we urge you to get your chartered accountant involved as early as possible, to make sure that you don’t fall foul of any rules and complete the process properly.