Contractor’s Questions: How can I close my company using ESC C16?

Contractor’s Question: How can I close my company using ESC C16? I’m looking for a tax-efficient way of taking money out of the limited company I’m closing down.

Expert’s Answer: If you have been trading for more than a year and you decide to close your company, you can make a request to HMRC under ESC C16 to treat any final distribution as capital rather than income.  If granted, this treatment enables the shareholder to realise the capital gain and then apply for Entrepreneur’s Relief via their personal tax return. Entrepreneurs’ Relief effectively reduces the tax rate on the gain to 10%, a better result than taking the money as a dividend and paying higher rate tax at 22.5%.  The amount of lifetime gains that can qualify for this treatment are restricted; currently this stands at £10 million.

Entrepreneurs’ Relief is available to anyone who makes qualifying gains on the disposal of all or part of a business, including the disposal of shares in their personal trading company.  There are certain qualifying conditions that have to be met before the relief is given, including statutory declarations that have to be provided to HMRC (given by you and usually submitted by your accountant), assuring them that you’re not continuing the same trade (phoenix company). Once you’ve made the decision to close your company a letter and declaration would be sent to HMRC to request the ESC, and a reply should be received within around 4 weeks.  Once it’s been agreed, the closure accounts can be finalised.

The current use of this Concession is under threat though, as a House of Lords decision in 2006 led to questions about the use of Extra Statutory Concessions and HMRC’s discretion to use them. A Consultation then followed in 2008 to identify which Concessions should be kept, which should be legislated, and which needed further clarification.  ESC C16 was identified as requiring further clarification, and, in December 2010, draft legislation was produced which proposed an upper limit on capital distributions of £4,000.  This would mean any distribution over £4,000 would be income, and subject to higher rates of tax.  The Consultation ended in March 2011 but, as of November 2011, the outcome has not been published.

The expert was Clare Rickman of InTouch Accounting, a personal online accounting adviser for contractors and freelancers.

Editor's Note: Related Reading -

Goodbye ESC C16; Hello ESC C16

How to pay the least tax closing a limited company

Contractors can only lose under the new ESC C16

Changes to ESC C16 run contrary to state policy

Bigger tax take awaits wind-ups over £25,000

Monday 28th November 2011