HMRC announces new changes for winding up a limited company

Amongst all the flak faced by HMRC this week for ‘cosying’ up to big businesses when negotiating tax settlements, the Revenue announced some interesting changes to the way limited companies can be wound up. These are worth noting for limited companies of all shapes and sizes.

Under the current rules, when a limited company is wound up, a final distribution of funds can be made to shareholders after creditors have been paid. Shareholders can also benefit from low rates of Capital Gains Tax due to Entrepreneurs Relief. This is all made possible due to what is known as Extra Statutory Concession (ESC) C16.

However, HMRC deemed this to be a form of tax avoidance and wanted to limit the amount of funds that can be distributed this way to £4,000. The new limit announced this week is £25,000 which is good news for some but a lot of organisations are unhappy as a lot of businesses will still be affected as a result.

As reported by Contract Eye earlier this week, according to HMRC, “In 2010 about 325,000 companies were dissolved informally and struck off without going into liquidation. It is possible that some companies making large distributions on the cessation of business may now opt to be formally wound up, in order to protect the tax position of their shareholders.”

Andrew Gotch, representing the Chartered Institute of Taxation, said:

“HMRC’s announcement of a higher ceiling is a step in the right direction. £4,000 would have been a ridiculously low level which would have rendered the legislated concession barely worth having. £25,000 is an improvement, but we would have liked to have seen a higher limit calculated per shareholder, or indeed no limit at all.

“The Government’s argument is that a low limit is needed for anti-avoidance purposes, but we have been offered no evidence that this concession has been abused. I hope the Government will consider a further increase to, or removal of, the ceiling during this proposal’s legislative passage so that the new law genuinely reflects the original concession.”

It’s worth keeping an eye on the new rules as they pass through the legislative process and if you think this might impact on you or your business it’s definitely worth having a chat with your personal accountant.