Winding up a UK company: HM Revenue to impose additional costs on small business

For many years UK businesses that have ceased to trade have had the opportunity to make use of a concessional tax treatment that allows them to be wound up and struck off the records at Companies House with minimal cost – the so called ESC C16 strategy.

This strategy has allowed monies retained in the business bank account to be returned to shareholders as a capital payment, which in turn has allowed shareholders to account for the receipt of monies under the capital gains tax regime – which is almost always an agreeable tax outcome compared to the alternative, which would be a dividend taxed as income.

The ESC C16 pathway has also allowed businesses to be struck off without the need to appoint a liquidator, saving several thousand £’s as a result – HM Revenue in the UK has indicated that the cost of a straightforward winding up is in the region of £7,500.

The above has worked well for many years, and has been the default option for many an individual who has have operated a business in the UK that is ceasing when the individual moves to Australia (or indeed anywhere in the world).

HM Revenue has been making noises for a while about the likelihood of an amendment to ESC C16, through the repeal of the concession and the introduction of a provision within full legislation.

It is now proposed that with effect from 1st March, 2012 there will be a ceiling of £25,000 that can be dealt with as a return of capital to shareholders without the need for a formal liquidation.

Where reserves exceed £25,000 the distribution prior to the striking off of the company will have to be administered as an income payment – on which individual shareholders who are higher rate taxpayers will have an additional tax liability – or a liquidator will have to be appointed with the resulting costs of several thousand £’s if capital gains tax treatment of distributed reserves is to be retained.

Note: For a basic rate taxpayer in the UK the tax credit attaching to an income dividend extinguishes the basic rate tax liability. However, 40% taxpayers and 50% taxpayers are charged at reduced rates of 32.5% and 42.5% respectively on dividend income, from which the tax credit is deducted. The net result is a liability of 25% and 36.11% respectively of the net distribution received.

Those who are concerned about the imposition of these additional costs on business are invited to sign an e-petition in an effort to have the issue debated more fully by HM Government in the UK.

GM Tax assists individuals who are moving from the UK to Australia with tax planning and the administration of UK businesses which they may have been operating while in the UK. This can include the winding up of a UK company which the individual has been operating while working in the UK.

If you are an individual who is planning to move to Australia and who operates a limited company in the UK we will be pleased to discuss with you a preferred strategy and the impact of the proposed changes.