End of ESC C16 1/3/12.

[philip@wellwoodhoyle]

Yesterday (6 Dec), HMRC published their proposals to scrap the ESC C16 and replace it with statute. The effective date will be 1 March 2012.

http://www.hmrc.gov.uk/tiin/tiin-esc-c16.pdf

The new law will limit the distibution upon cessation being treated as capital to just £25,000. Any balance over £25,000 will be taxed on the recipient as a dividend.

Some brief workings show that this will increase the tax by £11,250 for someone with a £100k distribution and £3,750 for someone with just £50k distribution. Only those with distributions under £25,000 will be unaffected.

The alternative is to appoint a liquidator (cost approx £5k) as under a formal liquidation, the capital treatment can be maintained for any amount. Obviously, this is worth it if you have £100k but not if you have £50k.

There are already appeals and challenges against this new law on the grounds that it doesn't do what it says on the tin. I.e. it is supposed to counter tax avoidance, yet the tax yield as per the announcement is nil. It actually makes "avoidance" more likely as under the ESC, HMRC have to approve the capital distribution so have the option to object if they feel it is for phoenixism etc - under the new law, there appears to be no clearance procedure - it seems the first £25k as capital is fixed and doesn't need prior approval! And of course, there's nothing to stop phoenixism via formal liquidation.

There's going to be an online petition to object to the arbitrary £25k threshold and no doubt someone will post a link when it's set up on the Govt website.

[ChimpMaster]

Thanks for posting. I believe this will impact quite a few of the seasoned contractors here.

My personal 'retirement' plan does make use of ESC to some extent and so I will be keen to see how this develops. I can imagine a raft of business people closing down their companies before the proposed cutover date, and finding other ways to do their business.

[prozak]

hmm I guess I've got some planning to do.

[philip@wellwoodhoyle]

e-Petition has now gone live

To Prevent HMRC imposing additional tax and cost burdens on very small businesses - e-petitions

We need as many signatures as possible if there's any hope of getting this changed.

You can also write to the Treasury directly with comments - the email address is in the announcement linked in the first post.

[Pondlife]

Thanks for posting.

[ChimpMaster]

Petition signed, but I'm guessing it has feck all chance of stopping HMRC on their ill-advised mission.

[Lewis]

I can remember when SJD used to recommend building up funds in the company and then it closing down, repeating every few years getting, I think it was, taper relief each time. At least I think that was how it worked.

Then ECS C16 came in and everybody said you can't close down and re-open anymore, often stating the assurances you need to give HMRC as the reason (i.e. that I won't trade again). That's been discussed before - actually you state that your company will cease trading - so whether this means you can't personally contract again through another Ltd is debatable.

But ... if they are removing the need for pre-approval, isn't that a good thing? Is this taking us back to something closer to the taper relief and thus allowing the old SJD approach?

It's a quesiton, I don't know the answer, but if it does make closing down and reopening a legitimate option then that sounds good to me ....

[philip@wellwoodhoyle]

I don't know for sure, but remember C16 being in force for many years, probably long before SJD became a popular contractor accountancy firm, so it's nothing recent.

No, it wasn't a condition of granting ESC C16 that you had to say you weren't going to trade again - the wording was that the company wasn't going to trade again.

As far as I know, there was never any change to the original ESC or any new rule preventing someone from closing down and starting up again, other than the normal general anti-avoidance rules which, again, as far as I am aware, were never invoked unless someone was seriously taking the mickey (and even then I don't know of any!).

Any anti-avoidance rules are unchanged with the new law. The ESC was only about capital treatment on striking off, it didn't include any anti-avoidance, so nothing has been lost nor gained. HMRC will still be able to challenge phoenixism in the same way they have always done so (if at all).

So, no, it's not better at all. The only saving grace is that you don't need to apply for capital treatment anymore. But the cost of that is it being limited to £25k.

[Lewis]

I must have misunderstood what SJD were recommending then; it was many years ago now and I didn't look at it in any detail.

I can see from a quick google that ECS C16 came in in 1985. So maybe it was the replacement of Taper Relief by Entrepreneurs Relief in 2008 that changed things for the SJD tactic.

Ho well, never mind, off topic anyway. I guess I'll be signing the petition then...

[Fred Bloggs]

Unfortunately, I never kept a copy of the SJD literature, but I remember quite clearly that SJD used to recommend that you paid yourself up to the 40% tax threshold then closed your Ltd Co down after 3 years, rinse and repeat. I never did this. I asked SJD about this approach at the time, of course SJD claimed there was never a problem with it. But my take was that it was taking the pi55 somewhat. From memory, they were definitely recommending contractors took that approach about 8 or so years ago, that would be about when I was looking into it.