It is probably fair to say that the removal of entrepreneurs’ relief (ER) on business incorporations came as a complete surprise to everyone. I received calls from a number of accountants after the Autumn Statement 2014 querying whether this in fact was true! Sole traders, partnerships and LLPs had been able to do sell their goodwill at a 10% CGT rate on incorporation for well over a decade now.

It is well known that HMRC did not particularly like this form of tax planning, which effectively enabled owner-managers to extract profits from their businesses at very low tax rates. In recent years, HMRC have only really been able to attack the goodwill valuation itself. Many will testify to long running correspondence with HMRC – Shares and Assets Valuation, which often appeared to adopt a stance of slowly ‘grinding’ the taxpayers into submission for a much lower valuation. HMRC also resisted the sale of personal goodwill on incorporation.

Furthermore, the ability to enjoy corporation tax relief on the amortisation of the purchased goodwill charged against the company’s profits has also now been blocked. Before 3 December 2014, the corporate intangibles rules enabled the company to receive tax relief on its goodwill amortisation in such cases, provided the unincorporated business had started trading after 31 March 2002. However, businesses that had already incorporated (in such circumstances) can continue to claim goodwill amortisation relief and are not affected by the new rules.

Those businesses that were decisive and had already incorporated will have breathed a huge sigh of relief. On the other hand, those businesses that were still dithering about incorporating must be kicking themselves. This golden opportunity has now passed!

New edition of my book on Tax Planning For Family and Owner Managed Companies

I am delighted to announce that Bloomsbury Professional has just published the latest 2012/13 edition of my book – Tax Planning For Family and Owner Managed Companies’ – which has been heavily updated for all relevant tax development and changes. The book can be ordered from Bloomsbury Professional (at www.bloomsburyprofessional.com), Amazon or any other reliable book seller.

Tax Planning For Family and Owner Managed Companies – 2012/13

R.I.P. ESC C16

We had to say goodbye to our ‘old friend’ ESC C16 on 29 February 2012,when it was abolished by HMRC.

Historically, the ESC C16 concession enabled distributions made to shareholders before a DISSOLUTION to be treated as beneficial ‘capital gains’ receipts, provided they were made before the directors applied to strike the company off. In effect, HMRC permitted
the distributions to be treated as capital distributions – applying the same tax treatment as if they had been paid out during the course of a winding-up – provided certain assurances were given. For example, HMRC had to be satisfied that the company:
• Had no intention to carry on the trade/business in future;
• Intended to pay off/discharge its debts (including its corporation tax liability) and distribute its remaining assets to its shareholders (or had already done so);
• Did not intend to transfer its business to another ‘commonly controlled’ company – HMRC clearly seeking to prevent unacceptable ‘phoenix’ arrangements.

The story of ESC C16’s demise can be traced back to the House of Lords ruling in R v HMRC Commissioners ex p Wilkinson [2005] UKHL 30. This case reviewed the scope of HMRC’s discretion powers to make extra-statutory concessions. As a result, HMRC was forced to review all its published concessions and, as part of this process, The Enactment of Extra-Statutory Concessions Order 2012 replaced ESC C16 with new legislation (s1030A and s1030B CTA 2010) from 1 March 2012 onwards.

On 1 March 2012, ESC C16 was replaced by the more restrictive statutory rules in s1030A CTA 2010. The new legislation provides that distributions made in contemplation of a dissolution under the Companies Act 2006 will not be taxed as ‘income’ distributions provided:
• When the distribution is made, the company has or intends to collect the amounts payable from its debtors and has satisfied or intends to repay all its creditors (known as ‘condition A’); and
• Importantly, the amount of the distribution or distributions does not exceed £25,000 (known as ‘condition B’).
In such cases, the distribution would be treated as a ‘capital distribution’ under s122 Taxation of Chargeable Gains Act 1992 (TCGA 1992), which effectively triggers a CGT disposal of the relevant shareholding. However, the imposition of an effective £25,000 ‘cap’ on the amount eligible for CGT treatment will now prevent many owner managers extinguishing ‘their’ companies under the dissolution route (remember the predecessor ESC C16 had no monetary limit!). Consequently, companies with net assets of more than £25,000 will now be forced down the formal liquidation route, and will have to bear the significant costs of a formal winding-up.

In the vast majority of cases, paying CGT will be more favourable than income tax, especially where the recipient shareholder is able to claim the beneficial 10% entrepreneurs’ relief (ER) CGT rate.

Where a company is formally liquidated, any distribution made to shareholders during the course of the winding-up is not taxed as income (s1000 CTA 2010). It therefore falls to be treated as a capital distribution under s122 TCGA 1992, triggering a deemed disposal of (an interest in) the relevant shares. The same beneficial tax treatment is available for pre-dissolution distributions provided they do not exceed £25,000.