Treatment Of Final Distribution From A Business

We are going through a tough time and there is a risk that so many businesses might have to close down; it will be useful to explain how the final distribution would work for directors and the business.

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm36220

The Extra Statutory Concession (ESC) – C16 was a well-used extra-statutory concession that allowed company directors to treat final distributions as a capital disposal and close down their business in an efficient manner. ESC C16 was withdrawn in March 2012 and replaced by s1030A Corporation Tax Act 2010 (CTA 2010) provisions.

This move meant that from 1 March 2012, the concessionary treatment provided by ESC C16 were replaced by more restrictive statutory rules which included the introduction of a new £25,000 threshold.

Under the legislation, distributions made in anticipation of dissolution under the striking off process will not be taxed as ‘income’ distributions provided:

• at the time of the distribution, the company has secured, or intends to secure, payment of debts due to it, and similarly has satisfied, or intends to satisfy, debts due from it, and
• the amount of the distribution, or total amount of distributions if more than one, does not exceed £25,000.

Directors with more than £25,000 of reserves will not be able to treat the final distribution as a capital disposal but rather as ‘income’ distributions.

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Conditions of ESCC16

1. The company is not one which, if the distributions were made in a winding up, would be reported to the Anti-Avoidance Group, Clearance and Counteraction Team in relation to ITA07/PART13/CHAPTER1 (formerly ICTA88/S703) under sub-paragraphs (e) or (f) of CTM36875.
2. The company is not the subject of an enquiry either on its own or as part of an enquiry embracing individuals or other companies.
3. The company satisfies an HMRC officer that:

(a) it does not intend to trade or carry on business in future, and

(b) it intends to collect its debts, pay off its creditors in full and distribute any balance of its assets to its shareholders (or has already done so), and

(c) it intends to seek or accept striking off and dissolution.

4. The company and its shareholders agree that:

(a) they will supply such information as is necessary to determine, and will pay, any CT liability on income or capital gains, and

1. b) the shareholders will pay any CGT liability (or CT in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made during a winding-up (see CG40430to CG40432).

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