Extra statutory concessions - fourth technical
consultation on draft legislation
Grant Thornton UK LLP (Grant Thornton) welcomes the opportunity to comment on the draft
legislation required to give legislative effect to a number of extra-statutory concessions (ECSs) operated by
HM Revenue and Customs (HMRC). We welcome the proposal to replace the informal concessions with
legislation.
We have considered the ESCs within this consultation and have decided to respond only in respect of the
proposals announced for ESC C16: dissolution of companies under s652 & s652A Companies Act 1985.
Consultation response - ESC C16
We have reviewed the draft legislation to assess whether this meets the objective set out in the
consultation document. In line with the consultation document released, it is our understanding that the
draft legislation is, "intended to maintain the existing tax treatment provided under the ESCs concerned".
We do not believe that this has been achieved, and our concerns are set out below.
Current position of the ESC
The existing ESC allows for capital treatment to be applied to the value of a distribution where the
company is then dissolved under the Companies Act (commonly referred to as a 'strike off') provided the
company and its shareholders give certain assurances to HMRC.
There is no restriction on the use of this concession where these assurances are given; the actual value of
the distribution is irrelevant for the purpose of the concession.
We do appreciate that certain restrictions are imposed on such distribution by Company Law, even where
the use of ESC C16 has been approved. Specifically, we refer to the distribution of assets relating to the
share capital of the company or non-distributable reserves, being unlawful distributions, which would
become bona vacantia following the striking off of the company. In such cases, for these funds to be
properly distributed to the shareholders, a formal liquidation is required. However, a statement was issued
in 2008 by the Treasury Solicitor's Office which confirms that no action will be taken to recover such
funds where they do not exceed £4,000.
Nonetheless, the value of the overall distribution is not in question here, just the value of the unlawful
element of it. So, for example, where a company has share capital of £1,000 and other assets of £99,000,
assuming the use of ESC C16 is approved, the shareholders can apply to strike off the company and
benefit from capital treatment on the distribution of the full £100,000.
Conversely, where a company has share capital of £5,000 and no other assets, even where the use of
ESC C16 has been approved, company law prevents the shareholders distributing these funds and
applying for the strike off of the company; a formal liquidation would be required.
Position proposed under the draft legislation
In broad terms, the draft legislation within the consultation document provides that a distribution will
attract capital treatment only where a company, "makes a distribution in respect of share capital", and the
distribution (or sum of the distributions) does not exceed £4,000.
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This clearly does not represent the content of the current ESC, under which there is no restriction as to
the type of distribution made (whether it be share capital or other reserves) nor to the value of the
distribution.
Effect of proposed change
ESC C16 is a valuable and widely used concession, particularly for shareholders of small and mediumsized companies, and we believe that the proposals will significantly disadvantage this group of taxpayers.
In our view, the draft legislation fails to accurately legislate the concession available under ESC C16. This
will undoubtedly lead to a change in approach to these situations, with shareholders of relevant companies
instead choosing to undertake a formal liquidation rather than be subject to income tax on any
distribution. This will add complexity and cost to these transactions, but is unlikely to alter the overall tax
revenue generated.
Take for example a company with assets of £100,000 (including nominal share capital) and a single
shareholder. Assuming that the shareholder is a higher rate taxpayer, and the receipt of these funds would
not take their income into the additional rate band, the income tax due on such a distribution under the
draft legislation would be £25,000. If the ESC continued in the way it currently does, and assuming that
the individual would benefit from full entrepreneurs' relief, the capital gains tax due on the distribution
would be only £10,000.
Even with the cost of a formal liquidation, the individual will no doubt opt for this route in order to
achieve the greatest return. Therefore, there will be no additional tax revenue raised, but it will bring with
it added complexity and commercial constraints which could be avoided if the full effect of ESC 16 was
available.
Conclusion
We believe that the draft legislation goes against the spirit of what the consultation is trying to achieve.
For this reason, and based upon the information we have included above, we believe that the draft
legislation should be revisited and rewritten to ensure it reflects the same result for taxpayers as the
existing ESC.
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Contacts
Questions concerning this paper can be addressed to:
Lindsey Wicks
(email: linsdey.wicks@uk.gt.com)
Grant Thornton UK LLP
Grant Thornton House
Melton Street
Euston Square
LONDON
NW1 2EP
Telephone:
Fax:
020 7383 5100
020 7383 4715
www.grant-thornton.co.uk
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