Company Dissolutions and ESC C16

When a company reaches the end of its useful life, there are a number of ways for the shareholders to extract the company’s remaining assets. A popular route is to ask the Registrar of Companies to strike the company off and take advantage of the tax treatment in Extra Statutory Concession C16. The benefit of ESC C16 is that distributions to shareholders are treated as if made in the course of a winding up – which means they are capital as opposed to income distributions.  If the individual pays income tax at the higher or additional rates, capital receipts will be more tax efficient.  Furthermore, capital receipts may  benefit from entrepreneurs’ relief, meaning that the rate of tax is 10% as opposed to 28%. This concessionary treatment needs to be agreed in advance with HM Revenue & Customs.

However, from 1 March 2012, ESC C16 is expected to be replaced by legislation, but not on  a like for like basis. Instead, if the legislation goes ahead as proposed, there will be a maximum of £25,000 in distributions which can be treated as capital instead of income. ESC C16 did not impose any such limit. Therefore, where total distributions on dissolution are likely to exceed £25,000, it may be well worth acting sooner rather than later. 

Interestingly, the Treasury Solicitor has also recently issued a statement to the effect that ‘bona vacantia’ will no longer be collected in practice. The bona vacantia rules were a risk previously as distributions prior to the striking off of a company could be unlawful distributions under the Companies Act, meaning that the amounts could be claimed by the Crown. However creditors may lodge claims against a company which has been struck off and these claims will find their way to the shareholders who received cash from the company. Because of this, there are risks involved in striking a company off rather than opting for a formal liquidation, so it is always important to consider these fully and take professional advice before making a final decision.