ESC C16 - Company Closure

[Wary]

I'm an IT contractor and am about to start a new contract. There are reasons why I'd like to close down my old company & start a new one, the most obvious being to take advantage of the ESC C16 concession.

My accountants say that I cannot do this, as I would not be able to provide assurances to HMRC that would result in me being granted ESC C16, due to the fact that I would intend to continue the same trade under a new company. However, a colleague's accountants are busy doing this for all of their clients mid-contract, claiming that it is only an issue if HMRC explicitly request such an undertaking and they only very rarely do so.

Who is correct? I have seen this described online as "phoenixing", or a "reconstruction" in which the shareholders in the original company retain an interest in the second company ... and is supposedly a highly questionable practice.

Apologies if this has been covered before; I had a look through recent posts but could find nothing.

[northernladuk]

Could you not? Google says about 130 pages...

Google ESC C16 Contractor UK

[Clare@InTouch]

In my experience HMRC will only grant the ESC if you supply a statutory declaration giving such assurance. You could of course always lie, and they'd only find out if they actually checked, but you'd run the risk of the income being reallocated as a dividend and end up with a big tax bill plus penalties and interest.

If you really want to do it, why not close and go brolly for 6 months, or take a long extended holiday. The ESC declaration doesn't mean you can never trade again, you just need to be able to demonstrate a commercial reason for closing.

[Wary]

Could you not? Google says about 130 pages...

Google ESC C16 Contractor UK

Thanks for the Google link. I was attempting to search via the internal forum search engine, but ESC & C16 were words that were deemed to be too short/common. I've had a delve through some old posts, and the consensus is that this is not legit.

[Wary]

In my experience HMRC will only grant the ESC if you supply a statutory declaration giving such assurance. You could of course always lie, and they'd only find out if they actually checked, but you'd run the risk of the income being reallocated as a dividend and end up with a big tax bill plus penalties and interest.

If you really want to do it, why not close and go brolly for 6 months, or take a long extended holiday. The ESC declaration doesn't mean you can never trade again, you just need to be able to demonstrate a commercial reason for closing.

Thanks Clare. I had heard that you only have to justify that it is your current intent not to set up another company, so it is still possible to legitimately trade in the future but obviously not straight away.

You mention going brolly for 6 months. Can one legitimately close their company using ESC C16 but carry on doing the same work (maybe the same contract) through an umbrella company? Or is it more a case of HMRC being less likely to find out?

[malvolio]

Thanks Clare. I had heard that you only have to justify that it is your current intent not to set up another company, so it is still possible to legitimately trade in the future but obviously not straight away.

You mention going brolly for 6 months. Can one legitimately close their company using ESC C16 but carry on doing the same work (maybe the same contract) through an umbrella company? Or is it more a case of HMRC being less likely to find out?

You might like to do the sums first. The tax losses you will incur through an umbrella may exceed the savings from ESC16.

Plus have a Google on the Ramsay principle. Hector may well think this applies.

[Wanderer]

I'm an IT contractor and am about to start a new contract. There are reasons why I'd like to close down my old company & start a new one, the most obvious being to take advantage of the ESC C16 concession.

Think about it - if you could legitimately do this then everyone would do it all the time. An accountant once told me that I could do whatever I liked but if I got investigated then I would have to pay the tax, plus interest and penalties....

Check out the sticky in welcome-faqs and you will see what the trick is for searching for these terms.

[Greg@CapitalCity]

I had heard that you only have to justify that it is your current intent not to set up another company, so it is still possible to legitimately trade in the future but obviously not straight away.

The assurances you would typically make are that the company:
• Does not intend to trade or carry on business in the future;
• Intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
• Intends to seek or accept striking off and dissolution.

There is no problem if you intend to keep working on the same contract through a brolly.

[Wary]

The assurances you would typically make are that the company:
• Does not intend to trade or carry on business in the future;
• Intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
• Intends to seek or accept striking off and dissolution.

Thanks Greg although if that truly is a definitive list of the assurances required, then it rather implies that it would be legit to set up a new company the following day. Hence I presume that there must be more assurances than this?

[Lewis]

In my experience HMRC will only grant the ESC if you supply a statutory declaration giving such assurance.

So do you make your clients write something along the lines of "I don't intend to continue the same trade under a new company."? When I looked into this, I was told the assurance (that relates to this point) you have to give is that the company will cease to trade.

The problem seemed to me not to do with getting the ESC 16 concession and the assurances you have to make, but more to some vagueness that you cannot close a company and open a new one for a tax advantage, but I don't have any references to where this is stated (it was posted on this forum somewhere).