Tax relief 'too low' for dissolved company shareholders

A government announcement on the tax treatment of distributions when a small company is dissolved without a formal winding up order has been criticised for being stingy to shareholders.

Before issuing its criticism, a leading tax body said it was right the state had raised the ceiling on tax-free distributions to shareholders when a company is dissolved above £4,000, as HM Revenue & Customs wanted. 

But the government’s revised plan - legislating so the existing Extra Statutory Concession C16 is restricted to the enlarged distributions total of £25,000, is still inadequate, said the Chartered Institute of Taxation.

The amount is simply too “low”, particularly when there is more than one shareholder – and, moreover, the concession that the legislation was designed to replace was free of any ceiling whatsoever on the tax-free distributions.

“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,” CIOT reflected.

“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.”

As a result, the institute is calling on the government to consider a further increase to, or removal of, the ceiling, believing that the new law should genuinely reflect the original concession.

The CIOT’s Andrew Gotch explained why: “When a solvent company ceases trading and there are assets to be divided up among shareholders, it is right that distributions are treated fairly for tax purposes.

“The formal winding up process, using a liquidator, can be costly and protracted. For a small company with straightforward affairs, the alternative of distributing the company’s remaining assets to shareholders once creditors have been paid and then applying for the company to be struck off the Register of Companies, is attractive, cost effective and efficient.

“In particular, it is in keeping with the government’s objective of simplifying the tax system for small businesses and reducing unnecessary burdens.”