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.