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Contractors set to pay more tax when dissolving a company, as ESC C16 changes are enacted
Posted Feb 3, 2012
Changes to the ESC C16 rules have now been enacted by the Commons, meaning that contractors closing their limited companies will have to pay more tax when making a final distribution from 1st March 2012.
How the concession currently works
The current ESC C16 concession allows Capital Gains Tax to be applied to the final distribution of funds when a limited company is wound up, rather than income tax, which is usually advantageous to shareholders.
The concession is meant to take into account the costs which would otherwise be borne by limited companies who go through the formal winding up process. Creditors and HMRC are also protected, as the final distribution is made after all outstanding debts have been paid.
If shareholders meet certain criteria, this final distribution may also be eligible for Entrepreneurs' Relief, meaning that a flat tax rate of a mere 10% will be applied to the gain. Otherwise, standard CGT rates of 18% or 28% apply for lower and higher rates respectively.
Changes to ESC C16 from 1st March 2012
In its efforts to stamp out any scope 'tax avoidance', the Government has now passed The Enactment of Extra-Statutory Concessions Order 2012, which limits the amount of benefit afforded to shareholders when a company is wound up. It also turns the current concession into legally binding rules.
From 1st March 2012, the cap on the beneficial treatment of final distributions will be capped at a mere £25,000. Any funds distributed beyond this point will be subject to standard income tax. Worryingly, HMRC's original suggested limit was a mere £4,000 prior to a technical consultation.
Clearly, limited company owners who are considering closing their companies, have only a limited time to take advantage of the current, more lenient, regime.
Tax body expresses 'extreme disappointment'
The CIOT has said that the reasoning behind the rule changes are based on flawed evidence, and that anti-avoidance legislation addressing the same area of taxation already exists.
The tax body said that HMRC was unable to produce any evidence that the current rules were being abused.
You can read HMRC's background to the Enactment of Extra-Statutory Concession C16 here (PDF).
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