Self assessment & company liquidation - distributions over two tax years

[poly1906]

Hoping some of the resident accounts on here can help me with some questions relating to company liquidation and the personal tax implications.

Myco entered liquidation in April 2012 – annoyingly just after ESC C16 was withdrawn - but just before the end of the 11/12 personal tax year.

The liquidator advised me that an initial capital distribution could be made before the start of the new tax year and this would allow two years CGT tax free allowances to be used. He provided me with an official document confirming the date and the amount of the official distribution for each shareholder. However when it came to passing the details onto my accountant for self assessment they said they were not comfortable with this arrangement as it seems like aggressive tax avoidance.

I have done a bit of googling and there seems to be conflicting advice:

On this thread, there are comments saying it may be possible depending on the circumstances.

This page says “there is some advantage to planning ahead (eg it may be possible to spread the capital distribution over 2 tax years, and so claim 2 years’ annual CGT exemption)”:

On the other hand, this page says “we suspect this will be viewed as too aggressive, and the HMRC may look to counteract the tax advantage using the Transactions in Securities rules”

Before I embarked on the process I hadn’t considered the possibility of using two years worth of CGT allowances and was prepared accordingly. However now I come to fill in my self assessment I am faced with the practicality of what numbers to use.

My problem is that I only have documentation for the initial distribution from 11/12. A subsequent distribution was madein June, but the process is not complete and there will be a further, final distribution. I am still waiting to find out what the liquidators fees will be and HMRC are in the process of making their final claims. As such, assuming I did want to put it through as a single distribution in 11/12, I don’t know what numbers I would use as the final accounts do not consider liquidation costs and I don’t know how much I will get at the end of the day. I refuse to believe it is a good idea to make these numbers up.

Does anyone have any thoughts as to what I should do?

[Maslins]

A couple of thoughts (and these are just my thoughts, not hard facts):

The liquidator won't have to deal with any possible comeback if HMRC challenge the personal tax returns. Therefore in this case they can be considered a bit like salespeople, telling you all the pros whilst hiding possible cons.

Having said that, I'm sure many of the experienced members on here will consider the timing of their dividends carefully. Is that aggressive tax avoidance?

With my accountant hat on, I don't really see a problem with it (ie distributions straddling tax years). At MVL Online we typically make two distributions (one for the bulk of the funds early on, then one at the end when all loose ends have been tied up). I'm sure we'll get cases starting in a couple of months where they'll straddle 5 April, that's just the way it goes.

If you strung out a £50k distribution over 5 years IMHO that'd clearly be taking the piss (plus with my liquidator hat on they wouldn't want to do that as they won't want a case open for longer than they need to).

I'd just put the early distribution on your 2011/12 tax return. Assuming you're claiming entrepreneurs relief, keep tabs on that (as you have a lifetime cap). If you're worried, the possible additional tax should only be ~£1,000 (based on 10% of the annual exemption amount) so I doubt it'd bankrupt you if HMRC did successfully object.

[philip@wellwoodhoyle]

I'd agree with Maslins above, but to protect yourself against penalties etc further down the line, I'd make a full disclosure in the "white space" in the further information box on the tax return, i.e. that there are going to be two distributions over two tax years and that you're putting each in the tax year it is paid as you've tried and failed to find a definitive instruction as to whether it needs to be disclosed over two years or just one. That should protect you against HMRC's "discovery" powers and reduce/eliminate any penalties if HMRC later disagree to your declarations.

[Nathan SJD Accountancy]

Hmmm...

I think the below link should help you find the defnitive answer to your query:

CG14850+ - CAPITAL GAINS MANUAL: Contents

Have a read of the introduction as I believe it may be relevant. It addresses the treatment when you have made a disposal, but consideration is not received immediately.

There is alot of information there with examples, so i'm sure you can find it there.

That failing, why not call HMRC and ask them. They can either answer you or refer you to the exact location in there manuals online that will give you the answer.

[poly1906]

Thanks all for the replies - I think I am going to proceed with just the initial distribution and declare the rest on this year's tax return.

[Jessica@WhiteFieldTax]

Hmmm...

I think the below link should help you find the defnitive answer to your query:

CG14850+ - CAPITAL GAINS MANUAL: Contents

Have a read of the introduction as I believe it may be relevant. It addresses the treatment when you have made a disposal, but consideration is not received immediately.

There is alot of information there with examples, so i'm sure you can find it there.

That failing, why not call HMRC and ask them. They can either answer you or refer you to the exact location in there manuals online that will give you the answer.

Hi Nathan, I'm not sure the URL you quote is the right part of the HMRC manuals - it refers to a disposal with deferred consideration.

My understanding was always that each distribution in a liquidation was a disposal in its own right?

Capital Gains Tax Procedures: Liquidations

Seems to suggest this?

[ASB]

I am not in anyway trying to suggest this is definitive, though I will recount my position.

During liquidation some years ago having applied for ESC16 it took some time for bills etc to be paid.

The bulk of a capital distribution was in year 1, duly declared etc. The remainder was in the following year (about 15% of the total).

My co wrote to the relevant inspector. I also did personally. At this time the bulf of their reply was "that's fine, thanks for letting us know". Ensure a note is added to the tax return.

My view was that the relief should only really be in one year (and I was perfectly prepared for this); but taxman- at that time at least - wasn't in the least bit bothered.